Jun 1, 2005 12:00 PM, Rorie M. Sherman Editor in Chief

By: Rorie M. Sherman Editor in Chief

From David A. Handler, partner with Kirkland & Ellis LLP in Chicago, we have these reports: IRS issues ruling on income taxation of deferred annuity. In Revenue Ruling 2005-30; 2005-20 IRB 1 (April 28), the Internal Revenue Service ruled that if the owner-annuitant of a deferred annuity contract dies before the annuity's starting date, and the beneficiary receives a death benefit under the annuity contract (either in a lump sum or as a series of periodic payments), the amount received by the beneficiary in excess of the owner-annuitant's investment in the contract is includible in the beneficiary's gross income as income in respect of a decedent (IRD) within the meaning of Internal Revenue Code Section 691.

If the death benefit is received as a series of periodic payments, the amounts includible in the beneficiary's gross income as IRD are determined under IRC Section 72. Revenue Ruling 79-335 has been modified and superseded for deferred annuity contracts purchased on or after Oct. 21, 1979. The holding of Rev. Rul. 70-143 (which was revoked by Rev. Rul. 79-335) continues to apply for deferred annuity contracts purchased before Oct. 21, 1979, including any contributions applied to those contracts pursuant to a binding commitment entered into before that date.

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