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Under regulations promulgated under section 1035, in order
for an exchange to qualify for nonrecognition treatment, it is
required only that the contracts be of the same type, e.g., an
annuity for an annuity and that the obligee under the two
contracts be the same person. No other requirements are set
forth in the applicable regulations. Section 1.1035-1(c), Income
Tax Regs., provides, in part, as follows:
Sec. 1.1035-1. Certain exchanges of insurance
policies.--Under the provisions of section 1035 no gain or
loss is recognized on the exchange of:
* * * * * * *
(c) An annuity contract for another annuity
contract (section 1035(a)(3)),
but section 1035 does not apply to such exchanges if the
policies exchanged do not relate to the same insured. The
exchange, without recognition of gain or loss, of an annuity
contract for another annuity contract under section
1035(a)(3) is limited to cases where the same person or
persons are the obligee or obligees under the contract
received in exchange as under the original contract. * * *
Respondent argues that because the entire Fortis annuity
contract was not replaced by the Equitable annuity contract,
petitioner's withdrawal of $119,000 from the Fortis annuity
contract does not qualify as a nontaxable exchange under section
1035 and is taxable to the extent of $30,535, the portion of the
withdrawal allocable to income.
Petitioner argues that because Fortis did not distribute any
funds to her personally but rather transferred the funds directly
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