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Rev. Rul. 1961-201 Document Info Printer

Revenue Rulings
Internal Revenue Service
 Revenue Ruling

Rev. Rul. 61-201

1961-2 C.B. 46

Sec. 72

Sec. 165

 Caution: Caution: Distinguished by Rev. Rul. 72-193

IRS Headnote

In determining the amount of loss sustained by the original purchaser upon
his surrender of a single premium refund annuity contract for a cash
consideration, the basis of the contract is its cost, less the amounts
previously received under the contract which were properly excluded from
the gross income of the recipient under the  law applicable at the time of
receipt. The excess of the basis, thus determined, over the amount received
upon surrender of the contract constitutes an ordinary loss. 

I.T. 3567, C.B. 1942-2, 105, modified. 

Full Text

Rev. Rul. 61-201 

Advice has been requested with respect to the method of computing the basis
of a single premium refund annuity contract for the purpose of determining
the amount of loss sustained by the original purchaser upon his surrender
of the annuity contract for a cash consideration. 

The taxpayer purchased a single premium refund annuity policy for 25 x
dollars. In 1956, he surrendered the policy for a cash consideration of 10
x dollars. The annuity payments received during prior years totaled 15 x
dollars of which 7 x dollars were excluded from gross income under the law
applicable at the time of receipt. 

I.T. 3567, C.B. 1942-2, 105, holds, insofar as pertinent here, that the
amount of a loss allowable upon the surrender of a single premium refund
annuity contract, is the cost less the aggregate of the amount received on
its surrender plus all other amounts received under the contract by the
annuitant. Under I.T. 3567 no distinction is made between annuity payments
which were included in the annuitant's gross income when received and
annuity payments which were excluded from the annuitant's gross income. 

Section 1.72-1(d)(1) of the Income Tax Regulations promulgated under
section 72 of the Internal Revenue Code of 1954, provides, in part, as
follows: 

Any amount received upon the surrender, redemption or maturity of a
contract to which section 72 applies, which is not received as an annuity
under the rules of section 1.72-2(b), shall be included in the gross income
of the recipient to the extent that it, when added to amounts previously
received under the contract and which were excludable from the gross income
of the recipient under the law applicable at the time of receipt, exceeds
the aggregate of premiums or other consideration paid. * * * 

It is clear that the contract under consideration is one to which section
72 of the Code applies and that the 10 x dollars received by the taxpayer,
upon surrender of the contract, was `an amount not received as an annuity'
under section 72(e) of the Code. It is likewise clear that, where the
transaction results in a loss, the same treatment should be afforded the
taxpayer as is afforded where the transaction results in a gain. Further,
the amount of 7 x dollars excluded from gross income in the instant case
merely represents a recovery of `basis' (investment) for which adjustment
is required under section 1016(a)(1) of the Code, which provides, as far as
here pertinent, that proper adjustment in respect of property shall in all
cases be made for receipts properly chargeable to capital account. 

Accordingly, in determining the amount of loss sustained in the instant
case by the original purchaser upon his surrender of a single premium
refund annuity contract for a cash consideration, the basis of the contract
is its cost (25 x dollars) less the amounts previously received under the
contract which were properly excludable from the gross income of the
recipient under the law applicable at the time of receipt (7 x dollars).
The excess of the basis thus determined (18 x dollars) over the amount
received upon surrender of the contract (10 x dollars) constitutes an
ordinary loss (8 x dollars). 

I.T. 3567, supar , is modified to remove therefrom the implication that the
entire amounts of the annuity payments received by the annuitant are
deducted from his cost of the annuity contract in computing the amount of
loss sustained upon its surrender. 

Nothing in this ruling should be construed as permitting a loss deduction
on the surrender of any contract other than a refund annuity.

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