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Taxpayer's right to receive payments under an annuity policy is income when annuity is purchased.

The IRS has ruled that a taxpayer's right to receive payments under an annuity policy as payment for professional services is a nonforfeitable right to property transferred in connection with the performance of services. As such, the fair market value (FMV) of the policy was includible in the taxpayer's gross income for the tax year in which the policy was purchased (Letter Rulings 9134004 and 9134006).

In the rulings, the taxpayer was an attorney who represented a client in a personal injury suit. As part of the settlement process, the taxpayer's client executed a release and indemnity agreement, under which the liability insurer was to pay a specified portion of the settlement proceeds to the taxpayer as payment for his legal services.

The liability insurer subsequently assigned its obligation to make payments to the taxpayer to a second insurance company. Under an assignment and assumption agreement, the second insurance company purchased an annuity policy from a guarantor to provide for a medium of payment to the taxpayer and to ensure that payment would be made.

The taxpayer was designated as the sole annuitant and payee, with his estate as beneficiary. Payments due under the annuity policy could not be accelerated, deferred, increased or encumbered. The taxpayer's rights from the insurance company were those of a general creditor, and he could not forfeit the payments to be made for any reason.

Taxation under Sec. 83

The Service cited Regs. Sec. 1.83-1(a)(1), which states that property is not taxable until it has become substantially vested. Property is substantially vested when it is either transferable or not subject to a substantial risk of forfeiture. Whether or not property is subject to a substantial risk of forfeiture depends on the facts and circumstances. A substantial risk of forfeiture exists when the rights in property are conditioned, directly or indirectly, on the future performance of services by an individual or on the occurrence of a condition related to the transfer's purpose.

The IRS concluded that the taxpayer's right to the payments from the annuity was not conditioned on future services, and that his interest was not subject to a substantial risk of forfeiture. The Service next determined that the taxpayer's right to receive payments constituted "property" as defined in Regs. Sec. 1.83-3(e). The IRS then ruled that the FMV of the taxpayer's right to receive payments under the annuity policy was taxable under Sec. 83 in the year the policy was purchased.
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Article Details
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Author:Patterson, Martha Priddy
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jun 1, 1992
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