IRS written determination 201424014

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201424014
Release Date: 6/13/2014
Index Number: 72.00-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
------------------, ID No. ----------------
Telephone Number:
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Refer Reply To:
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PLR-138374-13
Date:
March 10, 2014
Legend:
Taxpayer=--------------------------------------------------------------------------------
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State=-------------
Geographic Area=----------------------------------------------------------------------------
Parent=--------------------------------------------------------------------------------
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Age Range=--------------------
Age X=---
Age Y=-----
A=---
B=---
Dear ---------------:
This is in response to the letter submitted by your authorized representative,
requesting rulings on the application of certain sections of the Internal Revenue Code
(the “Code”)to an annuity product that Taxpayer intends to offer.
Taxpayer is a stock life insurance company organized and operated under the
laws of State. Taxpayer represents that it qualifies as a life insurance company under
section 816(a) of the Code and thatit is licensed to engage in the life insurance
business in Geographic Area.
Taxpayer joins in the filing of a consolidated federal income tax return with
Parent, who is the common parent of the affiliated group that includes Taxpayer. The
consolidated return is filed on a calendar year basis using an accrual accounting
method.

PLR-138374-13
2
Taxpayer intends to offer a new term certain annuity option with variable
payments (the “New Annuity Option”) with non-qualified deferred variable annuity
contracts (the “Contracts”).
The Contracts are variable contracts within the meaning of section 817(d) of the
Code and are registered with the Securities and Exchange Commission (“SEC”) under
the Securities Act of 1933. Each Contract offers various investment options to which
the owner may allocate net premiums and earnings thereon.
An Owner can elect any time prior to the Contract’s maturity date to apply the
Contract’s account value to an annuity option. The New Annuity Option will be made
available to Owners in addition to other annuity options offered by Taxpayer pursuant to
the Contracts. An Owner can elect the New Annuity Option only if a minimum account
value will be applied to the New Annuity Option. In addition, the account value must be
greater than the investment in the contract.
In order to elect the New Annuity Option, the Owner must be in the Age Range
on the business day on which Taxpayer receives an Owner’s election of the New
Annuity Option (i.e., the “Election Receipt Date” of the option). In the case ofjoint
Owners, both Owners must meet the age requirement. If the Contract has one
individual Owner or has a non-natural Owner with a single annuitant, the Owner can
add an individual as a contingent Owner or joint annuitant to the Contract, provided that
the individual meets the age requirements just described.
On the Election Receipt Date, the Owner will select the number of years in the
term certain annuity (the “Annuity Term”). Owners may not select an Annuity Term that
extends beyond the year in which the Owner attains Age X or, in the case of joint or
contingent Owners, the year in which the younger Owner attains Age Y. The Owner
can choose an Annuity Term that is shorter than the maximum Annuity Term. However,
the Annuity Term must be at least A or B years, depending on the Contract. Once the
Annuity Term is established, the duration of the Annuity Term cannot be changed
(except that the Annuity Term can be reduced as a result of commutation, as discussed
below).
After the Election Receipt Date, but on or before the date the first payment is
made under the New Annuity Option (the “Starting Payment Date”), the Owner can
revoke the election of the New Annuity Option and elect another annuity option. Absent
a revocation, on or after the Election Receipt Date the Owner cannot assign or change
ownership of the Contract and the Owner also cannot change the annuitants.
Moreover, unless there is a revocation, on or after the Election Receipt Date, the
duration of the Annuity Term cannot be changed (except that the Annuity Term can be
reduced in certain circumstances as a result of commutation). Finally, the Owner may
not pay additional premiums to the Contract on or after the Election Receipt Date,
absent a revocation.

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3
Taxpayer will determine the annualamount to be paid under the New Annuity
Option (the “Yearly Payment Amount”) on the “Calculation Date.” The Calculation Date
for the first Yearly Payment Amount is the Election Receipt Date. The Calculation Date
for each subsequent Yearly Payment Amountis the day before the anniversary of the
Election Receipt Date.
The Yearly Payment Amount for a year will be determined by dividing the
Contract’s account value as of the Calculation Date for the year by a whole number. In
the year the Owner elects the New Annuity Option, the divisor will be the number of
years in the Annuity Term selected by the Owner. In each subsequent year the divisor
will be the Annuity Term minus the number of years that have elapsed since the
Election Receipt Date. The Contract’s account value on the Calculation Date will
fluctuate from year to year due to the periodic payments that will be made from the
account value, the investment gains and losses of the variable sub-account
investments, and the crediting of interest above theminimum interest rate guarantee
under the fixed account, if any.
Due to the annual changes in the account value and the remaining Annuity Term,
the Yearly Payment Amount will also change annually. However, over the duration of
the Annuity Term the account value will always decrease and in the final year of the
Annuity Term the account value will be reduced to zero and the Contract will terminate.
*
The Yearly Payment Amount can be paid annually or in monthly or quarterly
installments (“Periodic Payments”), as elected by the Owner. The amount of each
Periodic Payment in a year is equal to the Yearly Payment Amount for the year divided
by the number of installment payments to be made each year. In other words, if the
Owner elects to receive the Yearly Payment Amount in monthly installments, each
Periodic Payment to be made in the year will equal the Yearly Payment Amount for the

*
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PLR-138374-13
4
year divided by 12. As described above, the Yearly Payment Amount will vary from
year to year, but the amount of each Periodic Payment within a year will be the same,
except as discussed in the next paragraph.
If the Contract’s account value is less than or equal to the Periodic Payment due,
the remaining account value will be paid and the Contract will terminate. In the last year
of the Annuity Term, the account value on the date of the last scheduled Periodic
Payment could be more than the amount of the scheduled payment, because, for
example, of positive investment performance since the previous Periodic Payment. In
that event, the scheduled Periodic Payment will be increased to an amount equal to the
remaining account value and the Contract will terminate.
Any time after the Starting Payment Date, the Owner can redeem part or all of
the Contract’s account value. If the Ownerredeems only a portion of the account value,
the amount of each subsequent Yearly Payment Amount, and thus, each Periodic
Payment payable in subsequent years after the redemption, will be partially commuted
because of the redemption. If the Owner redeemsall of the remaining account value,
the Periodic Payments will end and the Contract will terminate. Taxpayer will treat
amounts received by Owner in connection with a complete commutation as includible in
income to the extent that they exceed the remaining investment in the contract, and
amounts received in connection with a partial commutation as fully includible in income.
If any Owner dies or, in the case of a Contract held by a non-natural Owner, the
annuitant dies, on or after the Starting Payment Date, the surviving joint or contingent
Owner (or surviving joint annuitant, if there is a non-natural Owner), if any, will be
treated as the “beneficiary” and will continue the Periodic Payments for the remainder of
the Annuity Term. If there is no surviving joint or contingent Owner (or in the case of a
non-natural Owner, no surviving joint annuitant), the Periodic Payments will be made to
the beneficiary (or beneficiaries) named under the Contract for the remainder of the
Annuity Term. Periodic Paymentswill continue to be made at least as rapidly as before
the death and the account value will be depleted by the end of the Annuity Term. A
beneficiary, including a beneficiary that is any surviving joint or contingent Owner (or
surviving joint annuitant, if there is a non-natural Owner), has the option to partially or
fully commute the remaining Yearly Payment Amounts and thus, the future Periodic
Payments.
If multiple beneficiaries are named under the Contract, the account value will be
divided into shares for each beneficiary. The proportionate shares of the Periodic
Payments will continue to be made to each beneficiary for the remaining Annuity Term;
however, each beneficiary may partially or fully commute the beneficiary’s share. The
Election Receipt Date anniversary remains the same for each beneficiary electing to
continue the New Annuity Option. Finally, Periodic Payments may continue to
successive beneficiaries until the account value falls to zero, including through
commutations.

PLR-138374-13
5
ADDITIONAL REPRESENTATIONS
Taxpayer makes the following additional representations:
1. The Contracts are annuity contracts under the laws of the states and other
jurisdictions in which they are issued.
2. The Contracts satisfy the requirements of section 72(s).
3. The segregated asset accounts in which the Contracts invest are adequately
diversified within the meaning of section 817(h) and the regulations thereunder.
4. For federal tax purposes, Taxpayer is the owner of the assets held in the
segregated asset accounts.
REQUESTED RULINGS
1. The portion of each Periodic Payment that does not exceed the amount allocable to
the investment in the contract is treated as an amount received as an annuity and
will be excludable from gross income.The excess (if any) of each Periodic Payment
over such portion will be treated as an amount not received as an annuity on or after
the annuity starting date and will be includible in gross income.
2. On and after the date an Owner elects the New Annuity Option, no amount will be
includible in gross income before it is actually paid under the New Annuity Option.
LAW AND ANALYSIS
Requested Ruling 1
Section 72(a) provides that, except as otherwise provided in chapter 1 of the
Code, gross income includes any amount received as an annuity (whether for a period
certain or during one or more lives) under an annuity, endowment, or life insurance
contract.
Section 72(b)(1) provides, in general, that gross income does not include that
part of any amount received as an annuity under an annuity, endowment, or life
insurance contract which bears the same ratio to such amount as the investment in the
contract (as of the annuity starting date) bears to the expected return under the contract
(as of such date).

PLR-138374-13
6
Section 72(b)(2) provides that the portion of any amount received as an annuity
which is excluded from gross income under section 72(b)(1) shall not exceed the
unrecovered investment in the contract immediately before the receipt of such amount.
Section 72(c)(4) provides, generally, for purposes of section 72, that the annuity
starting date in the case of any contract is the first day of the first period for which an
amount is received as an annuity under the contract.
Section 1.72-4(b)(1) of the Income Tax Regulations (the “Regulations”) provides,
generally, that the first day of the first period for which an amount is received as an
annuity under the contract is the later of (i) the date upon which the obligations under
the contract become fixed or (ii) the first day of the period which ends on the date of the
first annuity payment.
Section 1.72-2(b)(2) provides that amounts subject to section 72 of the Code are
considered “amounts received as an annuity” only in the event that all of the following
tests are met:
(i)They must be received on or after the “annuity starting date” as that term
is defined in Section 1.72-4(b) of the Regulations;
(ii)They must be payable in periodic installments at regular intervals (whether
annually, semiannually, quarterly, monthly, weekly, or otherwise) over a
period of more thanone full year from the annuity starting date; and
(iii)Except as indicated in section 1.72-2(b)(3) of the Regulations, the total of
the amounts payable must be determinable at the annuity starting date
either directly from the terms of the contract or indirectly by the use of
either mortality tables or compound interest computations, or both, in
conjunction with such terms and in accordance with sound actuarial
theory.
Section 1.72-2(b)(3) provides, notwithstanding the requirement of section 1.72-
2(b)(2)(iii), if amounts are to be received for a definite or determinable time (whether for
a period certain or for a life or lives) under a contract which provides that the amount of
the periodic payments may vary with investment experience, then each such payment
received shall be considered as an amount received as an annuity only to the extent
that it does not exceed the amount computed by dividing the investment in the contract,
as adjusted for any refund feature, by the number of periodic payments anticipated
during the time periodic payments are to be made. If payments are to be made more
frequently than annually, the amount so computed shall be multiplied by the number of
periodic payments to be made during the taxable year for the purpose of determining
the total amount which may be considered received as an annuity during such year. To
this extent, the payments received shall be considered to represent a return of

PLR-138374-13
7
premiums or other consideration paid and shall be excludable from gross income in the
taxable year in which received. To the extent that the payments received under the
contract during the taxable year exceed the total amount thus considered to be received
as an annuity during such year, they shall be considered to be amounts not received as
an annuity and shall be included in the gross income of the recipient.
Here, each Periodic Payment under the New Annuity Option will be made after
the annuity starting date. Second, the Periodic Payments will be payable at regular
intervals over a period of more than one full year from the annuity starting date. Third,
the amounts payable will be determined in a way that complies with section 1.72-2(b)(3)
of the Regulations.
Requested Ruling 2
Section 1.451-1(a) of the Regulations provides that gains, profits, and income are
to be included in gross income for the taxable year in which they are actually or
constructively received by the taxpayer unless includible for a different year in
accordance with the taxpayer’s method of accounting.
Section 1.451-2(a) provides that income, although not actually reduced to a
taxpayer’s possession, is constructively received by the taxpayer in the taxable year
that it is credited to the taxpayer’s account, set apart for the taxpayer, or otherwise
made available so that thetaxpayer may draw upon it any time, or so that the taxpayer
could have drawn upon it during the taxable year if notice of intention to withdraw had
been given. However, the regulation provides that income is not constructively received
if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.
An annuity contract consists of an accumulation phase and a phase subsequent
to the annuity starting date, commonly referred to as annuitization. During the
accumulation phase, all amounts received by the holder are “amounts not received as
an annuity.” During the annuitization phase, if the requirements of sections 1.72-2(b)(2)
and (3) are met, amounts received by the holder may be characterized as “amounts
received as an annuity.” During the annuitization phase, amounts received by the
holder may, in certain circumstances, be characterized as “amounts not received as an
annuity.” See section 72(e)(2)(A) of the Code section 1.72-2(b)(3)(i) of the Regulations.
Regardless of the characterization of the payments made as “amounts received as an
annuity” or “amounts not received as an annuity,” no amount should be considered
constructively received by an annuitant before its actual payment under the proposed
distribution methods for several reasons.
First, section 72 provides a comprehensive scheme for the taxation of life
insurance, endowment, and annuity contracts. Section 72(a) and (b) provide, in
general, for the taxation of “amounts received as an annuity.” Section 72(e), ingeneral,

PLR-138374-13
8
taxes amounts received under life, endowment, and annuity contracts that are “not
received as annuities.”
Both section 72(a) and (e) literally require that amounts be “received” by the
holder before they are included in gross income. The statute is silent as to whether
amounts that are only “constructively received,” within the meaning of section 1.451-
2(a) of the Regulations, are “received” under section 72 and includible in gross income
in accordance with the provisions of section 72.
Second,prior to the enactment of the Tax Equity and Fiscal Responsibility Act of
1982 (“TEFRA”), 1982-2 C.B. 462, “amounts not received as an annuity” that were paid
out before the annuity starting date were includible in the holder’s gross income only
after theholder recovered the holder’s investment in the contract. The Conference
Committee Report to TEFRA explained the law prior to the statutory changes as follows:
Under present law, taxation of interest or other current earnings on a
policyholder’s investment in an annuity contract generally is deferred until annuity
payments are received or amounts characterized as income are withdrawn.
Amounts paid out before the annuity starting date are first a return of capital and
are taxable (as ordinary income) onlyafter the investment in the contract is
recovered.
H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. 646-47 (1982), 1982-2 C.B. 600, 685.
The Conference Committee generally followed the Senate amendment, which it
described in the following terms:
The Senate amendment provides that amounts received before the annuity
starting date will be treated first as withdrawals of income earned on investments
to the extent of such income, the remainder being treated as a return of capital.
Likewise, loans under the contract, or amounts received upon assignment or
pledging of the contract, will be treated as amounts received under the contract.
These provisions apply as of July 1, 1982, but do not apply to amounts allocable
to investments made before July 2, 1982, to endowment or life insurance
contracts (except to the extent prescribed in regulations), or to contracts
purchased under qualified plans.
H.R. Conf. Rep. No. 760 at 647, 1982-2 C.B. at 685. Thus, the TEFRA changes to
section 72 do not indicate that Congress intended to change prior law, which did not
apply the doctrine of constructive receipt to annuity contracts.
Third, section 72(e)(4)(A), which provides generally that if an individual receives
a loan under an annuity contract or pledges a portion of thevalue of such contract, the
amount of the loan or the portion of the value pledged will be treated as an amount not

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received as an annuity, is inconsistent with applying the doctrine of constructive receipt
to annuities. If the doctrine of constructive receipt applied, the increase in the annuity’s
cash value would be taxed once and would in many cases be subject to tax a second
time as an amount not received as an annuity under section 72(e)(2), a result
inconsistent with general income tax principles.
Fourth, the provisions of section 264(a) disallowing deductions on indebtedness
to purchase or carry certain annuities further support our conclusion that the doctrine of
constructive receipt does not apply to annuities. In fact, section 264(a)(3) generally
disallows a deduction for any amount paid or accrued on indebtedness incurred or
continued to purchase an annuity contract pursuant to a plan of purchase,
contemplating the systematic borrowing of part or all of the increases in cash value of
the contract. If such increases in cash value were taxable under the doctrine of
constructive receipt there would be no abuse for section 264 to correct.
Fifth, neither does section 72(u) operate to require the designated beneficiary to
include amounts in gross income prior to actual receipt. Section 72(u) only requires,
prior to actual receipt, the recognition of the income on the contract, in certain cases in
which the annuity contract is held by certain nonnatural persons. As defined in section
72(s)(4), for purposes of section 72(s), the term “designated beneficiary” means any
individual designated a beneficiary by the holder of the contract.
HOLDINGS
1. Each Periodic Payment received under the New Annuity Option shall be
considered as an “amount received as an annuity” within the meaning of section
72(b)(1) only to the extent that it does not exceed the amount computed by
dividing the investment in the Contract by the number of Periodic Payments
anticipated during the time that the Periodic Payments are to be made. To this
extent, the Periodic Payments received shall be considered to represent a return
of premiums or other consideration paid and shall be excludable from gross
income in the taxable year in which received. To the extent that the Periodic
Payments received under the New Annuity Option during the taxable year
exceed the total amount thus considered to be received as an annuity during
such year, they shall be considered to be amounts not received as an annuity
and shall be included in the gross incomeof the recipient.
2. On and after the date an Owner elects the New Annuity Option, no amount will
be includible in gross income before it is actually paid under the New Annuity
Option.
CAVEATS

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Taxpayer will have no mortality or morbidity risks associated with the New
Annuity Option, so it will take no life insurance reserve to support any portion of a
Contract that is applied to the New Annuity Option.
Except as expressly provided herein, no opinion is expressed concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. The rulings contained in this letter are based upon information and
representations submitted by Taxpayer and accompanied by a penalties of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination. This ruling is directed only to the taxpayer who requested it. Section
6110(k)(3) provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.
Sincerely,
SHERYL B. FLUM
Branch Chief, Branch 4
Office of the Associate Chief Counsel
(Financial Institutions & Products)
cc: