Dona Elizabeth Conway - Page 11

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          funds are still invested in annuity contracts (less the surrender           
          fee), except that now petitioner owns two annuity contracts.                
               Petitioner's funds (less the $10,000 surrender charge)                 
          remain invested in a similar annuity contract, and petitioner has           
          not personally received use or benefit of these funds since they            
          were originally invested in the Fortis annuity contract in 1992.            
               We conclude that petitioner's direct exchange of a portion             
          of her Fortis annuity contract for a new Equitable annuity                  
          contract qualifies under section 1035 and that no gain to                   
          petitioner is to be recognized by reason of the exchange.3                  
               Because the transaction qualifies as a nontaxable exchange,            
          petitioner is not liable for the 10-percent penalty under section           
          72(q) on any portion of the $119,000 withdrawal.                            

          Tax Basis in Petitioner's Home                                              
               In determining gain or loss on the sale of property, the               
          cost basis of the property is adjusted by capital improvements              
          made to such property.  Secs. 1001, 1012, 1016.                             
               Generally, taxpayers bear the burden of proving entitlement            
          to costs and deductions claimed.  Bennett Paper Corp. &                     

          3  In Rev. Rul. 90-24, 1990-1 C.B. 97, involving annuity                    
          contracts issued under sec. 403(b), a portion of funds invested             
          in one annuity contract is transferred directly to another                  
          similar annuity contract, and the transfer is treated as                    
          nontaxable.  In Rev. Proc. 92-44, 1992-1 C.B. 875, under certain            
          specified situations, partial cash distributions to taxpayers               
          from annuity contracts are treated as nontaxable to the extent              
          reinvested in similar annuity contracts.                                    

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