rp-16-36.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

# Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement;
determination of correct tax liability.
(Also Part I, Sections 72; 1.72-2, 1.72-4.)

Rev. Proc. 2016-36

## SECTION 1. PURPOSE

This revenue procedure provides guidance regarding the application of §§ 1.72-
2(b)(2) and 1.72-4(b)(1) of the Income Tax Regulations to amounts to which § 72 of the
Internal Revenue Code applies that are received from a non-qualified contract. This
revenue procedure does not apply to amounts to which § 72 applies that are received
under a qualified plan as described in § 72(e)(5)(D). See Notice 2016-39, 2016-26
I.R.B. __ (June 27, 2016).

## SECTION 2. BACKGROUND

.01 In general, § 72 provides that distributions from an annuity, endowment, or life
insurance contract are includible in gross income except to the extent the distribution is
a non-taxable return of investment. For purposes of determining the extent to which a
distribution is a non-taxable return of investment, § 72 distinguishes between an
"amount received as an annuity" and an "amount not received as an annuity."

<!-- PageBreak -->

.02 Notice 2016-39 concludes that periodic phased retirement benefits under a
qualified defined benefit plan do not qualify as "amounts received as an annuity" for
purposes of § 72 if all the following conditions apply:

(1) The employee begins to receive a portion of his or her retirement benefits
when he or she enters phased retirement and begins part-time employment, and will not
begin receiving his or her entire plan benefits until he or she ceases employment and
commences full retirement at an indeterminate future time (for this purpose, even if a full
retirement date is agreed upon at commencement of phased retirement, the employee's
date of full retirement is indeterminate as long as it is possible that date could change);

(2) The plan's obligations to the employee are based in part on the employee's
continued part-time employment (which affects both the duration of the payment of
phased retirement benefits and the amount of additional retirement benefits the
employee accrues during that period of part-time employment); and

(3) Under the plan terms, the employee does not have an election as to the form
of the phased retirement benefit to be paid during phased retirement, but elects a
distribution option at full retirement that applies to the employee's entire retirement
benefit, including the portion that commenced as phased retirement benefits.

.03 Notice 2016-39 provides that because the benefits are amounts not received as
an annuity that are paid under a qualified defined benefit plan, the employee recovers
investment in the contract under the rules in § 72(e)(8).

<!-- PageBreak -->

# SECTION 3. APPLICATION

.01 Section 72 differentiates between amounts received from qualified plans and
amounts received from non-qualified contracts. In particular, the treatment of amounts
that are not received as an annuity differs substantially depending on whether the
amount is received from a qualified plan or a non-qualified contract.

.02 Section 72(b)(1) provides that gross income does not include that part of any
amount received as an annuity under an annuity, endowment, or life insurance contract
that bears the same ratio to that amount as the investment in the contract (as of the
annuity starting date) bears to the expected return under the contract. For purposes of
§ 72(b), the investment in the contract as of the annuity starting date is (1) the
aggregate amount of premiums or other consideration paid for the contract, minus
(2) the aggregate amount received under the contract before such date, to the extent
that such amount was excludable from gross income. Section 72(c).

.03 Section 72(b), however, does not apply in the case of any amount received as an
annuity under a qualified employer retirement plan described in § 72(d)(1)(G) (which
includes a qualified defined benefit plan described in § 401(a)). Instead, the investment
in the contract is recovered under the simplified method of § 72(d)(1). Under this
method, gross income excludes the portion of a monthly annuity that does not exceed
the amount obtained by dividing (1) the investment in the contract by (2) the number of
anticipated payments determined under the table in § 72(d)(1)(B)(iii).

.04 Section 72(e) applies to any amount that is received under an annuity,
endowment, or life insurance contract and is not received as an annuity. Section

<!-- PageBreak -->

72(e)(2)(B) provides that if an amount to which § 72(e) applies is received before the
annuity starting date, it is included in gross income to the extent allocable to income on
the contract and is excluded from gross income to the extent allocable to the investment
in the contract. Section 72(e)(3)(A) provides that for purposes of section 72(e)(2)(B) an
amount is treated as allocable to income on the contract to the extent such amount
does not exceed the excess (if any) of the cash value of the contract (determined
without regard to any surrender charge) immediately before the amount is received over
the investment in the contract at such time.

.05 Section 72(e)(8), however, provides special rules for amounts not received as an
annuity from a trust or contract described in § 72(e)(5)(D) (which includes a qualified
defined benefit plan described in § 401(a)). Under § 72(e)(8)(B) and (C), the amount
allocated to the investment in the contract is the portion of the distribution that bears the
same ratio to the amount of the distribution as the investment in the contract bears to
the vested account balance. Section 72(e)(8)(B) provides that this determination is
made at the time of the distribution or at a time prescribed by the Secretary.

.06 The Internal Revenue Service will not apply Notice 2016-39 to amounts received
from a non-qualified contract. Accordingly, in applying §§ 1.72-2(b)(2) and 1.72-4(b)(1)
to a non-qualified contract, the possibility of further contributions to the contract or a
subsequent election under the contract to receive the benefit payable under the contract
in a different manner generally will not affect the determination of whether payments are
amounts received as an annuity.

<!-- PageBreak -->

## SECTION 4. EFFECTIVE DATE

This revenue procedure applies to taxable years beginning on or after January 1,
2016. Taxpayers, however, may apply this revenue procedure to taxable years
beginning before that date. This revenue procedure does not apply to amounts to which
§ 72 applies that are received under a qualified plan as described in § 72(e)(5)(D). See
Notice 2016-39.

## SECTION 5. DRAFTING INFORMATION

The principal author of this revenue procedure is Alexis A. MacIvor of the Office of
Assistant Chief Counsel (Financial Institutions and Products). For further information
regarding this revenue procedure, contact Ms. MacIvor at 202-317-6995 (not a toll-free
call).