SECTION 2. BACKGROUND

.01 Section 1035(a)(3) provides that no gain or loss shall be recognized on the exchange of an annuity contract for another annuity contract. The legislative history of § 1035 states that exchange treatment is appropriate for “individuals who have merely exchanged one insurance policy for another better suited to their needs.” H.R. Rep. No. 1337, 83d Cong., 2d Sess. 81 (1954). Section 1.1035–1 of the Income Tax Regulations provides that “the exchange, without recognition of gain or loss, of an annuity contract for another annuity contract under § 1035(a)(3) is limited to cases where the same person or persons are the obligee or obligees under the contract received in the exchange as under the original contract.”

.02 Section 72(e) governs the federal tax treatment of distributions from an annuity contract that are not received as an annuity. Under § 72(e)(2), such amounts generally are taxed on an income-first basis. Section 72(e)(12) provides that all annuity contracts issued by the same company to the same policyholder during any calendar year are treated as a single annuity contract for purposes of § 72(e).

.03 Section 72(q)(1) imposes a 10 percent penalty on withdrawals or surrenders

property or services made by affected Government entities; and

should be transmitted to the IRS.

Written comments should be sent to: CC:PA:LPD:PR (Notice 2008–38), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Alternatively, comments may be hand delivered between the hours of 8:00 a.m. and 4:00 p.m. Monday to Friday to CC:PA:LPD:PR (Notice 2008–38), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, D.C. Comments may also be transmitted electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include “Notice 2008–38” in the subject line of any electronic communications.

All comments will be available for public inspection and copying. Because Government entities will need guidance on compliance with section 3402(t) as soon as possible, comments, if any, must be received by April 28, 2008.

DRAFTING INFORMATION

The principal author of this notice is Stephen J. Coleman of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice, contact Stephen J. Coleman at (202) 622–4910 (not a toll-free call).

Credit for Increasing Research Activities: Filing Address and Requirements for Certain Claims for Credit or Refund

Notice 2008–39