Guidance Clarifies Tax-Free Treatment for Annuity Contract Exchanges

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IRS issues further guidance (Revenue Procedure 2011-38) to benefit taxpayers seeking tax-free treatment of exchanges of annuity contracts. The new guidance modifies or supersedes parts of a 2008 revenue procedure (Rev. Proc. 2008-24). Because taxpayers raised practical issues that diminish the effectiveness of the previous revenue procedure, IRS modifies the guidance to address the issues. Rev. Proc. 2008-24 gives circumstances for how a direct transfer of a portion of the cash surrender of an existing annuity contract for a second annuity contract would be a tax-free exchange under tax code Section 1035.