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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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