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to Equitable and because she gave up a portion of her Fortis
annuity contract solely in exchange for the new Equitable annuity
contract, the transaction should qualify as a nontaxable exchange
of annuity contracts under section 1035.
We agree with petitioner.
Neither section 1035 nor the regulations condition
nonrecognition treatment upon the exchange of an entire annuity
contract. Respondent cites no authority to support respondent's
position that nonrecognition treatment under section 1035 is
limited to exchanges involving replacement of entire annuity
contracts. Neither the statute nor the regulations contain any
such requirement, either expressly or by any necessary
implication.
Petitioner expressly indicated on her application with
Equitable that the Equitable annuity contract was being acquired
as part of a section 1035 exchange, and Fortis transferred the
$109,000 directly to Equitable. No funds were distributed to
petitioner.
The legislative history under section 1035 states that
section 1035 was enacted to provide nonrecognition treatment for
taxpayers "who have merely exchanged one * * * [annuity contract]
for another better suited to their needs and who have not
actually realized gain." H. Rept. 1337, 83d Cong., 2d Sess. 81
(1954). The funds withdrawn from the Fortis annuity contract
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