---
kind: "range"
citation: "26 C.F.R. §§ 1.72-4–1.72-11"
title: "26"
from: "1.72-4"
to: "1.72-11"
count: 8
url: "https://uscodex.org/cfr/26/1.72-4..1.72-11"
---

# §1.72-4. Exclusion ratio.

- (a) **General rule.**
  - (1)
    - (i) To determine the proportionate part of the total amount received each year as an annuity which is excludable from the gross income of a recipient in the taxable year of receipt (other than amounts received under (a) certain employee annuities described in [section 72(d)](/cfr/26/72.md?p=d) and § [1.72-13](/cfr/26/1.72-13.md), or [(b)](/cfr/26/1.72-13.md?p=b) certain annuities described in [section 72(o)](/cfr/26/72.md?p=o) and [§ 1.122-1](/cfr/26/1.122-1.md)), an exclusion ratio is to be determined for each contract. In general, this ratio is determined by dividing the investment in the contract as found under [§ 1.72-6](/cfr/26/1.72-6.md) by the expected return under such contract as found under [§ 1.72-5](/cfr/26/1.72-5.md). Where a single consideration is given for a particular contract which provides for two or more annuity elements, an exclusion ratio shall be determined for the contract as a whole by dividing the investment in such contract by the aggregate of the expected returns under all the annuity elements provided thereunder. However, where the provisions of [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 apply to payments received under such a contract, see [paragraph (b)(3)](/cfr/26/1.72-6.md?p=b-3) of § 1.72-6. In the case of a contract to which [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, the exclusion ratio for purposes of this [paragraph (a)](#a) is determined in accordance with [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) and, in particular, [§ 1.72-6(d)(5)(i)](/cfr/26/1.72-6.md?p=d-5-i).
    - (ii) The exclusion ratio for the particular contract is then applied to the total amount received as an annuity during the taxable year by each recipient. See, however, [paragraph (e)(3)](/cfr/26/1.72-5.md?p=e-3) of § 1.72-5. Any excess of the total amount received as an annuity during the taxable year over the amount determined by the application of the exclusion ratio to such total amount shall be included in the gross income of the recipient for the taxable year of receipt.
  - (2) The principles of [subparagraph (1)](#a-1) may be illustrated by the following example:
  - (3) The exclusion ratio shall be applied only to amounts received as an annuity within the meaning of that term under [paragraph (b)](#b) (2) and (3) of [§ 1.72-2](/cfr/26/1.72-2.md). Where the periodic payments increase in amount after the annuity starting date in a manner not provided by the terms of the contract at such date, the portion of such payments representing the increase is not an amount received as an annuity. For the treatment of amounts not received as an annuity, see [section 72(e)](/cfr/26/72.md?p=e) and [§ 1.72-11](/cfr/26/1.72-11.md). For special rules where [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 applies to amounts received, see [paragraph (d)(3)](#d-3) of this section.
  - (4) After an exclusion ratio has been determined for a particular contract, it shall be applied to any amounts received as an annuity thereunder unless or until one of the following occurs:
    - (i) The contract is assigned or transferred for a valuable consideration (see [section 72(g)](/cfr/26/72.md?p=g) and [paragraph (a)](/cfr/26/1.72-10.md?p=a) of § 1.72-10);
    - (ii) The contract matures or is surrendered, redeemed, or discharged in accordance with the provisions of paragraph [(c)](/cfr/26/1.72-11.md?p=c) or [(d)](/cfr/26/1.72-11.md?p=d) of § 1.72-11;
    - (iii) The contract is exchanged (or is considered to have been exchanged) in a manner described in [paragraph (e)](/cfr/26/1.72-11.md?p=e) of § 1.72-11.
- (b) **Annuity starting date.**
  - (1) Except as provided in [subparagraph (2)](#b-2) of this paragraph, the annuity starting date is the first day of the first period for which an amount is received as an annuity, except that if such date was before January 1, 1954, then the annuity starting date is January 1, 1954. The first day of the first period for which an amount is received as an annuity shall be whichever of the following is the later:
    - (i) The date upon which the obligations under the contract became fixed, or
    - (ii) The first day of the period (year, half-year, quarter, month, or otherwise, depending on whether payments are to be made annually, semiannually, quarterly, monthly, or otherwise) which ends on the date of the first annuity payment.
  - (2) Notwithstanding the provisions of [paragraph (b)(1)](#b-1) of this section, the annuity starting date shall be determined in accordance with whichever of the following provisions is appropriate:
    - (i) In the case of a joint and survivor annuity contract described in [section 72(i)](/cfr/26/72.md?p=i) and [paragraph (b)(3)](/cfr/26/1.72-5.md?p=b-3) of § 1.72-5, the annuity starting date is January 1, 1954, or the first day of the first period for which an amount is received as an annuity by the surviving annuitant, whichever is the later;
    - (ii) In the case of the transfer of an annuity contract for a valuable consideration, as described in [section 72(g)](/cfr/26/72.md?p=g) and [paragraph (a)](/cfr/26/1.72-10.md?p=a) of § 1.72-10, the annuity starting date shall be January 1, 1954, or the first day of the first period for which the transferee received an amount as an annuity, whichever is the later;
    - (iii) If the provisions of [paragraph (e)](/cfr/26/1.72-11.md?p=e) of § 1.72-11 apply to an exchange of one contract for another, or to a transaction deemed to be such an exchange, the annuity starting date of the contract received (or deemed received) in exchange shall be January 1, 1954, or the first day of the first period for which an amount is received as an annuity under such contract, whichever is the later; and
    - (iv) In the case of an employee who has retired from work because of personal injuries or sickness, and who is receiving amounts under a plan that is a wage continuation plan under [section 105(d)](/cfr/26/105.md?p=d) and [§ 1.105-4](/cfr/26/1.105-4.md), the annuity starting date shall be the date the employee reaches mandatory retirement age, as defined in [§ 1.105-4(a)(3)(i)(B)](/cfr/26/1.105-4.md?p=a-3-i-B). (See also §§ [1.72-15](/cfr/26/1.72-15.md) and [1.105-6](/cfr/26/1.105-6.md) for transitional and other special rules.)
- (c) **Fiscal year taxpayers.** Fiscal year taxpayers receiving amounts as annuities in a taxable year to which the Internal Revenue Code of 1954 applies shall determine the annuity starting date in accordance with [section 72(c)(4)](/cfr/26/72.md?p=c-4) and this section. The annuity starting date for fiscal year taxpayers receiving amounts as an annuity in a taxable year to which the Internal Revenue Code of 1939 applies shall be January 1, 1954, except where the first day of the first period for which an amount is received by such a taxpayer as an annuity is subsequent thereto and before the end of a fiscal year to which the Internal Revenue Code of 1939 applied. In such case, the latter date shall be the annuity starting date. In all cases where a fiscal year taxpayer received an amount as an annuity in a taxable year to which the Internal Revenue Code of 1939 applied and subsequent to the annuity starting date determined in accordance with the provisions of this paragraph, such amount shall be disregarded for the purposes of [section 72](/cfr/26/72.md) and the regulations thereunder.
- (d) **Exceptions to the general rule.**
  - (1) Where the provisions of [section 72](/cfr/26/72.md) would otherwise require an exclusion ratio to be determined, but the investment in the contract (determined under [§ 1.72-6](/cfr/26/1.72-6.md)) is an amount of zero or less, no exclusion ratio shall be determined and all amounts received under such a contract shall be includible in the gross income of the recipient for the purposes of [section 72](/cfr/26/72.md).
  - (2) Where the investment in the contract is equal to or greater than the total expected return under such contract found under [§ 1.72-5](/cfr/26/1.72-5.md), the exclusion ratio shall be considered to be 100 percent and all amounts received as an annuity under such contract shall be excludable from the recipient's gross income. See, for example, [paragraph (f)(1)](/cfr/26/1.72-5.md?p=f-1) of § 1.72-5. In the case of a contract to which [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this [paragraph (d)(2)](#d-2) is applied in the manner prescribed in [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) and, in particular, [§ 1.72-6(d)(5)(ii)](/cfr/26/1.72-6.md?p=d-5-ii).
  - (3)
    - (i) If a contract provides for payments to be made to a taxpayer in the manner described in [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2, the investment in the contract shall be considered to be equal to the expected return under such contract and the resulting exclusion ratio (100%) shall be applied to all amounts received as an annuity under such contract. For any taxable year, payments received under such a contract shall be considered to be amounts received as an annuity only to the extent that they do not exceed the portion of the investment in the contract which is properly allocable to that year and hence excludable from gross income as a return of premiums or other consideration paid for the contract. The portion of the investment in the contract which is properly allocable to any taxable year shall be determined by dividing the investment in the contract (adjusted for any refund feature in the manner described in [paragraph (d)](/cfr/26/1.72-7.md?p=d) of § 1.72-7) by the applicable multiple (whether for a term certain, life, or lives) which would otherwise be used in determining the expected return for such a contract under [§ 1.72-5](/cfr/26/1.72-5.md). The multiple shall be adjusted in accordance with the provisions of the table in [paragraph (a)(2)](/cfr/26/1.72-5.md?p=a-2) of § 1.72-5, if any adjustment is necessary, before making the above computation. If payments are to be made more frequently than annually and the number of payments to be made in the taxable year in which the annuity begins are less than the number of payments to be made each year thereafter, the amounts considered received as an annuity (as otherwise determined under this subdivision) shall not exceed, for such taxable year (including a short taxable year), an amount which bears the same ratio to the portion of the investment in the contract considered allocable to each taxable year as the number of payments to be made in the first year bears to the number of payments to be made in each succeeding year. Thus, if payments are to be made monthly, only seven payments will be made in the first taxable year, and the portion of the investment in the contract allocable to a full year of payments is $600, the amounts considered received as an annuity in the first taxable year cannot exceed $350 ($600 × 7/12). See subdivision (iii) of this subparagraph for an example illustrating the determination of the portion of the investment in the contract allocable to one taxable year of the taxpayer.
    - (ii) If subdivision (i) of this subparagraph applies to amounts received by a taxpayer and the total amount of payments he receives in a taxable year is less than the total amount excludable for such year under subdivision (i) of this subparagraph, the taxpayer may elect, in a succeeding taxable year in which he receives another payment, to redetermine the amounts to be received as an annuity during the current and succeeding taxable years. This shall be computed in accordance with the provisions of subdivision (i) of this subparagraph except that:

      (a) The difference between the portion of the investment in the contract allocable to a taxable year, as found in accordance with subdivision (i) of this subparagraph, and the total payments actually received in the taxable year prior to the election shall be divided by the applicable life expectancy of the annuitant (or annuitants), found in accordance with the appropriate table in [§ 1.72-9](/cfr/26/1.72-9.md) (and adjusted in accordance with [paragraph (a)(2)](/cfr/26/1.72-5.md?p=a-2) of § 1.72-5), or by the remaining term of a term certain annuity, computed as of the first day of the first period for which an amount is received as an annuity in the taxable year of the election; and

      (b) The amount determined under (a) of this subdivision shall be added to the portion of the investment in the contract allocable to each taxable year (as otherwise found). To the extent that the total periodic payments received under the contract in the taxable year of the election or any succeeding taxable year does not equal this total sum, such payments shall be excludable from the gross income of the recipient. To the extent such payments exceed the sum so found, they shall be fully includible in the recipient's gross income. See subdivision (iii) of this subparagraph for an example illustrating the redetermination of amounts to be received as an annuity and subdivision (iv) of this subparagraph for the method of making the election provided by this subdivision.

    - (iii) The application of the principles of [paragraph (d)(3)](#d-3) (i) and (ii) of this section may be illustrated by the following example:
    - (iv) If the taxpayer chooses to make the election described in subdivision (ii) of this subparagraph, he shall file with his return a statement that he elects to make a redetermination of the amounts excludable from gross income under his annuity contract in accordance with the provisions of [paragraph (d)(3)](#d-3) of § 1.72-4. This statement shall also contain the following information:

      (a) The original annuity starting date and his age on that date,

      (b) The date of the first day of the first period for which he received an amount in the current taxable year,

      (c) The investment in the contract originally determined (as adjusted for any refund feature), and

      (d) The aggregate of all amounts received under the contract between the date indicated in (a) of this subdivision and the day after the date indicated in (b) of this subdivision to the extent such amounts were excludable from gross income.

    - (v) In the case of a contract to which [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this [paragraph (d)(3)](#d-3) is applied in the manner prescribed in [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) and, in particular, [§ 1.72-6(d)(5)(iii)](/cfr/26/1.72-6.md?p=d-5-iii). This application may be illustrated by the following example:
    - (vi) The method of making an election to perform the separate computations illustrated in [paragraph (d)(3)(v)](#d-3-v) of this section is described in [§ 1.72-6(d)(6)](/cfr/26/1.72-6.md?p=d-6).
- (e) **Exclusion ratio in the case of two or more annuity elements acquired for a single consideration.**
  - (1)
    - (i) Where two or more annuity elements are provided under a contract described in [paragraph (a)(2)](/cfr/26/1.72-2.md?p=a-2) of § 1.72-2, an exclusion ratio shall be determined for the contract as a whole and applied to all amounts received as an annuity under any of the annuity elements. To obtain this ratio, the investment in the contract determined in accordance with [§ 1.72-6](/cfr/26/1.72-6.md) shall be divided by the aggregate of the expected returns found with respect to each of the annuity elements in accordance with [§ 1.72-5](/cfr/26/1.72-5.md). For this purpose, it is immaterial that payments under one or more of the annuity elements involved have not commenced at the time when an amount is first received as an annuity under one or more of the other annuity elements.
    - (ii) **The exclusion ratio found under subdivision (i) of this subparagraph does not apply to—** (a) An annuity element payable to a surviving annuitant under a joint and survivor annuity contract to which [section 72(i)](/cfr/26/72.md?p=i) and paragraphs [(b)(3)](/cfr/26/1.72-5.md?p=b-3) and [(e)(3)](/cfr/26/1.72-5.md?p=e-3) of § 1.72-5 apply, or to

      (b) A contract under which one or more of the constituent annuity elements provides for payments described in [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2.

  - (2) If one or more of the annuity elements under a contract described in [paragraph (a)(2)](/cfr/26/1.72-2.md?p=a-2) of § 1.72-2 provides for payments to which [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 applies:
    - (i) With respect to the annuity elements to which [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 does not apply, an exclusion ratio shall be determined by dividing the portion of the investment in the entire contract which is properly allocable to all such elements (in the manner provided in [paragraph (b)(3)(ii)](/cfr/26/1.72-6.md?p=b-3-ii) of § 1.72-6) by the aggregate of the expected returns thereunder and such ratio shall be applied in the manner described in subdivision (i) of [subparagraph (1)](#e-1); and
    - (ii) With respect to the annuity elements to which [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 does apply, the investment in the entire contract shall be reduced by the portion thereof found in subdivision (i) of this subparagraph and the resulting amount shall be used to determine the extent to which the aggregate of the payments received during the taxable year under all such elements is excludable from gross income. The amount so excludable shall be allocated to each recipient under such elements in the same ratio that the total of payments he receives each year bears to the total of the payments received by all such recipients during the year. The exclusion ratio with respect to the amounts so allocated shall be 100 percent. See [paragraph (f)(2)](/cfr/26/1.72-5.md?p=f-2) of § 1.72-5 and [paragraph (b)(3)](/cfr/26/1.72-6.md?p=b-3) of § 1.72-6.
    - (iii) In the case of a contract to which [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this [paragraph (e)](#e) is applied in the manner prescribed in [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) and, in particular, [§ 1.72-6(d)(5)(iv)](/cfr/26/1.72-6.md?p=d-5-iv).

# §1.72-5. Expected return.

- (a) **Expected return for but one life.**
  - (1) If a contract to which [section 72](/cfr/26/72.md) applies provides that one annuitant is to receive a fixed monthly income for life, the expected return is determined by multiplying the total of the annuity payments to be received annually by the multiple shown in Table I or V (whichever is applicable) of [§ 1.72-9](/cfr/26/1.72-9.md) under the age (as of the annuity starting date) and, if applicable, sex of the measuring life (usually the annuitant's). Thus, where a male purchases a contract before July 1, 1986, providing for an immediate annuity of $100 per month for his life and, as of the annuity starting date (in this case the date of purchase), the annuitant's age at his nearest birthday is 66, the expected return is computed as follows:
  - (2)
    - (i) If payments are to be made quarterly, semiannually, or annually, an adjustment of the applicable multiple shown in Table I or V (whichever is applicable) may be required. A further adjustment may be required where the interval between the annuity starting date and the date of the first payment is less than the interval between future payments. Neither adjustment shall be made, however, if the payments are to be made more frequently than quarterly. The amount of the adjustment, if any, is to be found in accordance with the following table:
    - (ii) Notwithstanding the table in subdivision (i) of this subparagraph, adjustments of multiples for early or other than monthly payments determined prior to February 19, 1956, under the table prescribed in paragraph 1(b)(4) of T.D. 6118 (19 FR 9897, C.B. 1955-1, 699), approved December 30, 1954, need not be redetermined.
  - (3) If the contract provides for fixed payments to be made to an annuitant until death or until the expiration of a specified limited period, whichever occurs earlier, the expected return of such temporary life annuity is determined by multiplying the total of the annuity payments to be received annually by the multiple shown in Table IV or VIII (whichever is applicable) of [§ 1.72-9](/cfr/26/1.72-9.md) for the age (as of the annuity starting date) and, if applicable, sex of the annuitant and the nearest whole number of years in the specified period. For example, if a male annuitant, age 60 (at his nearest birthday), is to receive $60 per month for five years or until he dies, whichever is earlier, and there is no post-June 1986, investment in the contract, the expected return under such a contract is $3,456, computed as follows:
  - (4) If the contract provides for payments to be made to an annuitant for the annuitant's lifetime, but the amount of the annual payments is to be decreased after the expiration of a specified limited period, the expected return is computed by considering the contract as a combination of a whole life annuity for the smaller amount plus a temporary life annuity for an amount equal to the difference between the larger and the smaller amount. For example, if a male annuitant, age 60, is to receive $150 per month for five years or until his earlier death, and is to receive $90 per month for the remainder of his lifetime after such five years, the expected return is computed as if the annuitant's contract consisted of a whole life annuity for $90 per month plus a five year temporary life annuity of $60 per month. In such circumstances, the expected return if there is no post-June 1986 investment in the contract is computed as follows:
  - (5) If the contract described in [subparagraph (4)](#a-4) of this paragraph provided that the amount of the annual payments to the annuitant were to be increased (instead of decreased) after the expiration of a specified limited period, the expected return would be computed as if the annuitant's contract consisted of a whole life annuity for the larger amount minus a temporary life annuity for an amount equal to the difference between the larger and smaller amount. Thus, if the annuitant described in [subparagraph (4)](#a-4) of this paragraph were to receive $90 per month for five years or until his earlier death, and to receive $150 per month for the remainder of his lifetime after such five years, the expected return would be computed by subtracting the expected return under a five year temporary life annuity of $60 per month from the expected return under a whole life annuity of $150 per month. In such circumstances, the expected return if there is no post-June 1986 investment in the contract is computed as follows:
- (b) **Expected return under joint and survivor and joint annuities.**
  - (1) In the case of a joint and survivor annuity contract involving two annuitants which provides the first annuitant with a fixed monthly income for life and, after the death of the first annuitant, provides an identical monthly income for life to a second annuitant, the expected return shall be determined by multiplying the total amount of the payments to be received annually by the multiple obtained from Table II or VI (whichever is applicable) of [§ 1.72-9](/cfr/26/1.72-9.md) under the ages (as of the annuity starting date) and, if applicable, sexes of the living annuitants. For example, a husband purchases a joint and survivor annuity contract providing for payments of $100 per month for life and, after his death, for the same amount to his wife for the remainder of her life. As of the annuity starting date his age at his nearest birthday is 70 and that of his wife at her nearest birthday is 67. If there is no post-June 1986 investment in the contract, the expected return is computed as follows:
  - (2) If a contract of the type described in [subparagraph (1)](#b-1) of this paragraph provides that a different (rather than an identical) monthly income is payable to the second annuitant, the expected return is computed in the following manner. The applicable multiple in Table II or VI (whichever is applicable) is first found as in the example in [subparagraph (1)](#b-1) of this paragraph. The multiple applicable to the first annuitant is then found in Table I or V (whichever is applicable) as though the contract were for a single life annuity. The multiple from Table I or V is then subtracted from the multiple obtained from Table II or VI and the resulting multiple is applied to the total payments to be received annually under the contract by the second annuitant. The result is the expected return with respect to the second annuitant. The portion of the expected return with respect to payments to be made during the first annuitant's life is then computed by applying the multiple found in Table I or V to the total annual payments to be received by such annuitant under the contract. The expected returns with respect to each of the annuitants separately are then aggregated to obtain the expected return under the entire contract.
  - (3) In the case of a joint and survivor annuity contract in respect of which the first annuitant died in 1951, 1952, or 1953, and the basis of the surviving annuitant's interest in the contract was determinable under section 113(a)(5) of the Internal Revenue Code of 1939, such basis shall be considered the “aggregate of premiums or other consideration paid” by the surviving annuitant for the contract. (For rules governing this determination, see [26 CFR](/cfr/26.md) (1939) 39.22(b)(2)-2 and 39.113(a)(5)-1 (Regulations 118).) In determining such an annuitant's investment in the contract, such aggregate shall be reduced by any amounts received under the contract by the surviving annuitant before the annuity starting date, to the extent such amounts were excludable from his gross income at the time of receipt. The expected return of the surviving annuitant in such cases shall be determined in the manner prescribed in [paragraph (a)](#a) of this section, as though the surviving annuitant alone were involved. For this purpose, the appropriate multiple for the survivor shall be obtained from Table I as of the annuity starting date determined in accordance with [paragraph (b)(2)(i)](/cfr/26/1.72-4.md?p=b-2-i) of § 1.72-4.
  - (4) If a contract involving two annuitants provides for fixed monthly payments to be made as a joint life annuity until the death of the first annuitant to die (in other words, only as long as both remain alive), the expected return under such contract shall be determined by multiplying the total of the annuity payments to be received annually under the contract by the multiple obtained from Table IIA or VIA (whichever is applicable) of [§ 1.72-9](/cfr/26/1.72-9.md) under the ages (as of the annuity starting date) and, if applicable, sexes of the annuitants. If, however, payments are to be made under the contract quarterly, semiannually, or annually, an appropriate adjustment of the multiple found in Table IIA or VIA shall be made in accordance with [paragraph (a)(2)](#a-2) of this section.
  - (5) If a joint and survivor annuity contract involving two annuitants provides that a specified amount shall be paid during their joint lives and a different specified amount shall be paid to the survivor upon the death of whichever of the annuitants is the first to die, the following preliminary computation shall be made in all cases preparatory to determining the expected return under the contract:
    - (i) From Table II or VI (whichever is applicable), obtain the multiple under both of the annuitants' ages (as of the annuity starting date) and, if applicable, their appropriate sexes;
    - (ii) From Table IIA or VIA (whichever is applicable), obtain the multiple applicable to both annuitants' ages (as of the annuity starting date) and, if applicable, their appropriate sexes;
    - (iii) Apply the multiple found in subdivision (i) of this subparagraph to the total of the amounts to be received annually after the death of the first to die; and
    - (iv) Apply the multiple found in subdivision (ii) of this subparagraph to the difference between the total of the amounts to be received annually before and the total of the amounts to be received annually after the death of the first to die.
  - (6) If a contract provides for the payment of life annuities to two persons during their respective lives and, after the death of one (without regard to which one dies first), provides that the survivor shall receive for life both his own annuity payments and the payments made formerly to the deceased person, the expected return shall be determined in accordance with [paragraph (e)(4)](#e-4) of this section.
  - (7) If [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 applies to payments provided under a contract and this paragraph applies to such payments, the principles of this paragraph shall be used in making the computations described in [paragraph (d)(3)](/cfr/26/1.72-4.md?p=d-3) of § 1.72-4. This may be illustrated by the following examples, examples (1) through (3) of which assume that there is no post-June 1986 investment in the contract:
- (c) **Expected return for term certain.** In the case of a contract providing for specific periodic payments which are to be paid for a term certain such as a fixed number of months or years, without regard to life expectancy, the expected return is determined by multiplying the fixed number of years or months for which payments are to be made on or after the annuity starting date by the amount of the payment provided in the contract for each such period.
- (d) **Expected return with respect to amount certain.** In the case of contracts involving no life or lives as a measurement of their duration, but under which a determinable total amount is to be paid in installments of lesser amounts paid at periodic intervals, the expected return shall be the total amount guaranteed. If an amount is to be paid periodically until a fund plus interest at a fixed rate is exhausted, but further payments may be made thereafter because of earnings at a higher interest rate, this paragraph shall apply to the total amount anticipatable as a result of the amount of the fund plus the fixed interest thereon. Any amount which may be paid as the result of earnings at a greater interest rate shall be disregarded in determining the expected return. If such an amount is later received, it shall be considered an amount not received as an annuity after the annuity starting date. See [paragraph (b)(2)](/cfr/26/1.72-11.md?p=b-2) of § 1.72-11.
- (e) **Expected return where two or more annuity elements providing for fixed payments are acquired for a single consideration.**
  - (1) In the case of a contract described in [paragraph (a)(2)](/cfr/26/1.72-2.md?p=a-2) of § 1.72-2, which provides for specified payments to be made under two or more annuity elements, the expected return shall be found for the contract as a whole by aggregating the expected returns found with respect to each annuity element. If individual life annuity elements are involved (including joint and survivor annuities where the primary annuitant died before January 1, 1954) the expected return for each of them shall be determined in the manner prescribed in [paragraph (a)](#a) of this section. If joint and survivor annuity elements are involved, the expected return for such elements shall be determined under the appropriate subparagraph of [paragraph (b)](#b) of this section. If terms certain or amounts certain are involved, the expected returns for such elements shall be determined under paragraph [(c)](#c) or [(d)](#d) of this section, respectively.
  - (2) The aggregate expected return found in accordance with the rules set forth in [subparagraph (1)](#e-1) of this paragraph shall constitute the expected return for the contract as a whole. The investment in the contract shall be divided by the amount thus determined to obtain the exclusion ratio for the contract as a whole, This exclusion ratio shall be applied to all amounts received as an annuity under the contract by any recipient (in accordance with the provisions of [§ 1.72-4](/cfr/26/1.72-4.md)), except in the case of amounts received by a surviving annuitant under a joint and survivor annuity element to which the provisions of [section 72(i)](/cfr/26/72.md?p=i) and [paragraph (b)(3)](#b-3) of this section would apply if it were a separate contract. See [subparagraph (3)](#e-3) of this paragraph.
  - (3) In the case of a contract providing two or more annuity elements, one of which is a joint and survivor annuity element of the type described in [section 72(i)](/cfr/26/72.md?p=i) and [paragraph (b)(3)](#b-3) of this section, the general exclusion ratio for the contract as a whole, for the purpose of computations with respect to all the other annuity elements shall be determined in accordance with the principles of subparagraphs [(1)](#e-1) and [(2)](#e-2) of this paragraph. A special exclusion ratio shall thereafter be determined for the surviving annuitant receiving payments under the annuity element described in [section 72(i)](/cfr/26/72.md?p=i) and [paragraph (b)(3)](#b-3) of this section by using the investment in the contract and the expected return determined in accordance with the provisions of [paragraph (b)(3)](#b-3) of this section.
  - (4) In the case of a contract providing for payments to be made to two persons in the manner described in [paragraph (b)(6)](#b-6) of this section, the expected return is to be computed as though there were two joint and survivor annuities under the same contract, in the following manner. First, the multiple appropriate to the ages (as of the annuity starting date) and, if applicable, sexes of the annuitants involved shall be found in Table II or VI (whichever is applicable) of [§ 1.72-9](/cfr/26/1.72-9.md) and adjusted, if necessary, in the manner described in [paragraph (a)(2)](#a-2) of this section. Second, the multiple so found shall be applied to the sum of the payments to be made each year to both annuitants. The result is the expected return for the contract as a whole.
  - (5) For rules relating to expected return where two or more annuity elements are acquired for a single consideration and one or more of such elements does not specify a fixed payment for each period, see [paragraph (f)](#f) of this section.
- (f) **Expected return with respect to obligations providing for payments described in paragraph (b)(3) of § 1.72-2.**
  - (1) If a contract to which [section 72](/cfr/26/72.md) applies provides only for payments to be made in a manner described in [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2, the expected return for such contract as a whole shall be an amount equal to the investment in the contract found in accordance with [section 72(c)(1)](/cfr/26/72.md?p=c-1) and [§ 1.72-6](/cfr/26/1.72-6.md), as adjusted for any refund feature in accordance with [§ 1.72-7](/cfr/26/1.72-7.md).
  - (2) If a contract to which [section 72](/cfr/26/72.md) applies provides for annuity elements, one or more of which (but not all) provide for payments to be made in a manner described in [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2:
    - (i) With respect to the portion of the contract providing for annuity elements to which [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 does not apply, the expected return shall be the aggregate of the expected returns found for each of such elements in accordance with the appropriate paragraph of this section; and
    - (ii) With respect to all annuity elements to which [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 does apply, the expected return for all such elements shall be an amount equal to the portion of the investment in the contract allocable to such elements in accordance with the provisions of [paragraph (e)(2)(ii)](/cfr/26/1.72-4.md?p=e-2-ii) of § 1.72-4 and [paragraph (b)(3)(ii)(b)](/cfr/26/1.72-6.md) of § 1.72-6.
- (g) **Expected return with respect to contracts subject to § 1.72-6(d).** In the case of a contract to which [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, an expected return is computed using the multiples in Tables I through IV of [§ 1.72-9](/cfr/26/1.72-9.md) with respect to the pre-July 1986 investment in the contract and a second expected return is computed using the multiples in Tables V through VIII of [§ 1.72-9](/cfr/26/1.72-9.md) with respect to the post-June 1986 investment in the contract.

# §1.72-6. Investment in the contract.

- (a) **General rule.**
  - (1) For the purpose of computing the “investment in the contract”, it is first necessary to determine the “aggregate amount of premiums or other consideration paid” for such contract. See [section 72(c)(1)](/cfr/26/72.md?p=c-1). This determination is made as of the later of the annuity starting date of the contract or the date on which an amount is first received thereunder as an annuity. The amount so found is then reduced by the sum of the following amounts in order to find the investment in the contract:
    - (i) The total amount of any return of premiums or dividends received (including unrepaid loans or dividends applied against the principal or interest on such loans) on or before the date on which the foregoing determination is made, and
    - (ii) The total of any other amounts received with respect to the contract on or before such date which were excludable from the gross income of the recipient under the income tax law applicable at the time of receipt.
  - (2) For the purpose of [subparagraph (1)](#a-1) of this paragraph, amounts received subsequent to the receipt of an amount as an annuity or subsequent to the annuity starting date, whichever is the later, shall be disregarded. See, however, [§ 1.72-11](/cfr/26/1.72-11.md).
  - (3) The application of this paragraph may be illustrated by the following examples:
- (b) **Allocation of the investment in the contract where two or more annuity elements are acquired for a single consideration.**
  - (1) In the case of a contract described in [§ 1.72-2(a)(2)](/cfr/26/1.72-2.md?p=a-2) which provides for two or more annuity elements, the investment in the contract determined under [paragraph (a)](#a) shall be allocated to each of the annuity elements in the ratio that the expected return under each annuity element bears to the aggregate of the expected returns under all the annuity elements. The exclusion ratio for the contract as a whole shall be determined by dividing the investment in the contract (after adjustment for the present value of any or all refund features) by the aggregate of the expected returns under all the annuity elements. This may be illustrated by the following examples:
  - (2) In the case of a contract providing for specified annual annuity payments to be made to two persons during their joint lives and the payment of the aggregate of the two individual payments to the survivor for his life, the investment in the contract shall be allocated in accordance with the provisions of [subparagraph (1)](#b-1) of this paragraph. For this purpose, the investment in the contract (without regard to the fact that differing amounts may have been contributed by the two annuitants) shall be divided by the expected return determined in accordance with [paragraph (e)(4)](/cfr/26/1.72-5.md?p=e-4) of § 1.72-5. The resulting exclusion ratio shall then be applied to any amounts received as an annuity by either annuitant.
  - (3) In the case of a contract providing two or more annuity elements, one or more of which provides for payments to be made in a manner described in [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2, the investment in the contract shall be allocated to the various annuity elements in the following manner.
    - (i) If all the annuity elements provide for payments to be made in the manner described in [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2, the investment in the contract shall be allocated on the basis of the amounts received by each recipient by apportioning the amount determined to be excludable under that section to each recipient in the same ratio as the total of the amounts received by him in the taxable year bears to the total of the amounts received by all recipients during the same period; and
    - (ii) If one or more, but not all, of the annuity elements provide for payments to be made in a manner described in [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2:

      (a) With respect to all annuity elements to which that section does not apply, the investment in the contract for all such elements shall be the portion of the investment in the contract as a whole (found in accordance with the provisions of this section) which is properly allocable to all such elements; and

      (b) With respect to all annuity elements to which [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 does apply, the investment in the contract for all such elements shall be the investment in the contract as a whole (found in accordance with the provisions of this section) as reduced by the portion thereof determined under (a) of this subdivision.

    - (iii) In the case of a contract to which [paragraph (d)](#d) of this section applies, this [paragraph (b)](#b) is applied in the manner prescribed in [paragraph (d)](#d) and, in particular, [paragraph (d)(5)(v)](#d-5-v) of this section.
- (c) **Special rules.**
  - (1) For the special rule for determining the investment in the contract for a surviving annuitant in cases where the prior annuitant of a joint and survivor annuity contract died in 1951, 1952, or 1953, see [paragraph (b)(3)](/cfr/26/1.72-5.md?p=b-3) of § 1.72-5.
  - (2) For special rules relating to the determination of the investment in the contract where employer contributions are involved, see [§ 1.72-8](/cfr/26/1.72-8.md). See also [paragraph (b)](/cfr/26/1.72-16.md?p=b) of § 1.72-16 for a special rule relating to the determination of the premiums or other consideration paid for a contract where an employee is taxable on the premiums paid for life insurance protection that is purchased by and considered to be a distribution from an exempt employees' trust.
  - (3) For the determination of an adjustment in investment in the contract in cases where a contract contains a refund feature, see [§ 1.72-7](/cfr/26/1.72-7.md).
  - (4) In the case of “face-amount certificates” described in [section 72(1)](/cfr/26/72.md?p=1), the amount of consideration paid for purposes of computing the investment in the contract shall include any amount added to the holder's basis by reason of [section 1232(a)(3)(E)](/cfr/26/1232.md?p=a-3-E) (relating to basis adjustment for amount of original issue discount ratably included in gross income as interest under [section 1232(a)(3)](/cfr/26/1232.md?p=a-3)).
- (d) **Pre-July 1986 and post-June 1986 investment in the contract.**
  - (1) This [paragraph (d)](#d) applies to an annuity contract if:
    - (i) The investment in the contract includes a pre-July 1986 investment in the contract and a post-June 1986 investment in the contract (both as defined in [§ 1.72-6(d)(3)](#d-3));
    - (ii) The use of a multiple found in Tables I through VIII of [§ 1.72-9](/cfr/26/1.72-9.md) is required to determine the expected return under the contract; and
    - (iii) **The election described in paragraph (d)(6) of this section is made with respect to the contract.**
  - (2) **In the case of annuity contract to which this paragraph (d) applies—**
    - (i) All computations required to determine the amount excludable from gross income shall be performed separately with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract as if each such amount were the entire investment in the contract;
    - (ii) The multiples in Tables I through IV shall be used for computations involving the pre-July 1986 investment in the contract and the multiples in Tables V through VIII shall be used for computations involving the post-June 1986 investment in the contract; and
    - (iii) The amount excludable from gross income shall be the sum of the amounts determined under the separate computations required by [paragraph (d)(2)(i)](#d-2-i) of this section.
  - (3) For purposes of the regulations under [section 72](/cfr/26/72.md), the pre-July 1986 investment in the contract and post-June 1986 investment in the contract are determined in accordance with the following rules:
    - (i)
      - (A) Except as provided in [§ 1.72-9](/cfr/26/1.72-9.md), if the annuity starting date of the contract occurs before July 1, 1986, the pre-July 1986 investment in the contract is the total investment in the contract as of the annuity starting date;
      - (B) Except as provided in [§ 1.72-9](/cfr/26/1.72-9.md), if the annuity starting date of the contract occurs after June 30, 1986, and the contract does not provide for a disqualifying form of payment or settlement, the pre-July 1986 investment in the contract is the investment in the contract computed as of June 30, 1986, as if June 30, 1986, had been the later of the annuity starting date of the contract or the date on which an amount is first received thereunder as an annuity;
      - (C) If the annuity starting date of the contract occurs after June 30, 1986, and the contract provides, at the option of the annuitant or of any other person (including, in the case of an employee's annuity, an option exercisable only by, or with the consent of, the employer), for a disqualifying form of payment or settlement, the pre-July 1986 investment in the contract is zero (i.e., the total investment in the contract is post-June 1986 investment in the contract).
    - (ii) The post-June 1986 investment in the contract is the amount by which the total investment in the contract as of the annuity starting date exceeds the pre-July 1986 investment in the contract.
    - (iii) For purposes of [paragraph (d)(3)(i)](#d-3-i) of this section, a disqualifying form of payment or settlement is any form of payment or settlement (whether or not selected) that permits the receipt of amounts under the contract in a form other than a life annuity. For example, each of the following options provides for a disqualifying form of payment or settlement:
      - (A) **An option to receive a lump sum in full discharge of the obligation under the contract.**
      - (B) An option to receive an amount under the contract after June 30, 1986, and before the annuity starting date.
      - (C) **An option to receive an annuity for a period certain.**
      - (D) An option to receive payments under a refund feature (within the meaning of paragraphs [(b)](/cfr/26/1.72-7.md?p=b) and [(c)](/cfr/26/1.72-7.md?p=c) of § 1.72-7) that is substantially equivalent to an annuity for a period certain.
      - (E) An option to receive a temporary life annuity (within the meaning of [§ 1.72-5 (a)(3)](/cfr/26/1.72-5.md?p=a-3)) that is substantially equivalent to an annuity for a period certain.
    - (iv) For purposes of [paragraph (d)(3)(iii)](#d-3-iii) of this section, a refund feature is substantially equivalent to an annuity for a period certain if its value determined under Table VII of [§ 1.72-9](/cfr/26/1.72-9.md) exceeds 50 percent. Similarly, a temporary life annuity is substantially equivalent to an annuity for a period certain if the multiple determined under Table VIII of [§ 1.72-9](/cfr/26/1.72-9.md) exceeds 50 percent of the maximum duration of the annuity.
  - (4) In any separate computation under this [paragraph (d)](#d), only the applicable portion of other amounts (such as the total expected return under the contract, or the total amount guaranteed under the contract as of the annuity starting date) shall be taken into account if the use of the entire amount in such computation is inconsistent with the use in the computation of only a portion of the investment in the contract. For example, such use is generally inconsistent if the computation requires a comparison of the investment in the contract and such other amount for the purpose of using the greater (or lesser) amount or the difference between the two. For purposes of the first sentence of this [paragraph (d)(4)](#d-4), the applicable portion is the amount that bears the same ratio to the entire amount as the pre-July 1986, investment in the contract or the post-June 1986 investment in the contract, whichever is applicable, bears to the total investment in the contract as of the annuity starting date.
  - (5) **Application to particular computations.**
    - (i) In the case of a contract to which this [paragraph (d)](#d) applies, the exclusion ratio for purposes of [§ 1.72-4 (a)](/cfr/26/1.72-4.md?p=a) is the sum of the exclusion ratios separately computed in accordance with this [paragraph (d)](#d). The exclusion ratio with respect to the pre-July 1986 investment in the contract is determined by dividing the pre-July 1986 investment in the contract by the expected return as found under [§ 1.72-5](/cfr/26/1.72-5.md) by applying the appropriate multiples of Tables I through IV of [§ 1.72-9](/cfr/26/1.72-9.md). Similarly, the exclusion ratio with respect to the post-June 1986 investment in the contract is determined by dividing the post-June 1986 investment in the contract by the expected return as found under [§ 1.72-5](/cfr/26/1.72-5.md) by applying the appropriate multiples in Tables V through VIII of [§ 1.72-9](/cfr/26/1.72-9.md).
    - (ii) The applicability of [§ 1.72-4(d)(2)](/cfr/26/1.72-4.md?p=d-2) to a contract to which this [paragraph (d)](#d) applies shall be determined separately with respect to the post-June 1986 investment in the contract and the pre-July 1986 investment in the contract and in each such determination only the applicable portion of the total expected return under the contract shall be taken into account. If [§ 1.72-4(d)(2)](/cfr/26/1.72-4.md?p=d-2) applies with respect to either such investment in the contract, the separately computed exclusion ratio shall be considered to be the applicable portion of 100 percent.
    - (iii) If [§ 1.72-4(d)(3)](/cfr/26/1.72-4.md?p=d-3) applies to a contract to which this [paragraph (d)](#d) applies—
      - (A) The applicable portions (as defined in [paragraph (d)(4)](#d-4) of this section) of payments received under the contract for a taxable year shall be separately computed;
      - (B) The pre-July 1986 investment in the contract and the post-June 1986 investment in the contract shall be separately allocated to the taxable year; and
      - (C) The separate applicable portions of the payments received under the contract for the taxable year shall be considered to be amounts received as an annuity (for which the exclusion ratio is 100 percent) only to the extent they do not exceed the portions of the corresponding investments in the contract which are properly allocable to that year.
    - (iv) If [§ 1.72-4(e)](/cfr/26/1.72-4.md?p=e) applies to a contract to which this [paragraph (d)](#d) applies, the exclusion ratio shall be separately computed with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract. For purposes of the separate computations under [§ 1.72-4(e)(2)(ii)](/cfr/26/1.72-4.md?p=e-2-ii), only the applicable portion of payments received shall be taken into account and the exclusion ratio (100%) shall be applied to the separately computed portion allocated to each participant.
    - (v) If [paragraph (b)(3)](#b-3) of this section applies to a contract to which this [paragraph (d)](#d) applies, separate allocations are required with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract.
    - (vi) If [§ 1.72-7](/cfr/26/1.72-7.md) applies to a contract to which this [paragraph (d)](#d) applies, separate computations are required to determine the adjustment to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract. For purposes of such separate computations, only the applicable portions of the amounts described in § [1.72-7 (b)(3)(ii)](/cfr/26/1.72-7.md?p=b-3-ii), [(c)(1)(ii)(B)](/cfr/26/1.72-7.md?p=c-1-ii-B), [(c)(2)(vii)(B)](/cfr/26/1.72-7.md?p=c-2-vii-B), and [(d)(1)(ii)](/cfr/26/1.72-7.md?p=c-d-1-ii) are taken into account. Similarly, in the case of computations with respect to the guarantee of a specified amount under [§ 1.72-7(d)(1)](/cfr/26/1.72-7.md?p=d-1), only the applicable portion of such amount is taken into account.
  - (6) This [paragraph (d)](#d) applies to a contract only if the first taxpayer to receive an amount as an annuity under the contract elects to perform separate computations with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract as if each such amount were the entire investment in contract. If two or more annuitants receive an amount as an annuity under the contract at the same time (such as under a joint-and-last-survivorship annuity contract), an election by one of the annuitants is treated as an election by each of the annuitants. The election is made by attaching a statement to the first return filed by the taxpayer for the first taxable year in which an amount is received as an annuity under the contract. The statement must indicate that the taxpayer is electing to apply the provisions of [paragraph (d)](#d) of § 1.72-6, and must also contain the name, address, and taxpayer identification number of each annuitant under the contract, and the amount of the pre-July 1986 investment in the contract.
  - (7) If the investment in the contract includes a post-June 1986 investment in the contract and the election described in [paragraph (d)(6)](#d-6) of this section is not made—
    - (i) The amount excludable from gross income shall be determined without regard to the separate computations described in this [paragraph (d)](#d); and
    - (ii) Only the multiples found in Tables V through VIII shall be used in determining the amount excludable from gross income.

# §1.72-7. Adjustment in investment where a contract contains a refund feature.

- (a) **Definition of a contract containing a refund feature.** A contract to which [section 72](/cfr/26/72.md) applies, contains a refund feature if:
  - (1) The total amount receivable as an annuity under such contract depends, in whole or in part, on the continuing life of one or more persons,
  - (2) The contract provides for payments to be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a specified amount or a stated number of payments has not been paid to the annuitant or annuitants prior to death, and
  - (3) **Such payments are in the nature of a refund of the consideration paid.** See [paragraph (c)(1)](/cfr/26/1.72-11.md?p=c-1) of § 1.72-11.
- (b) **Adjustment of investment for the refund feature in the case of a single life annuity.** Where a single life annuity contract to which [section 72](/cfr/26/72.md) applies contains a refund feature and the special rule of [paragraph (d)](#d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:
  - (1) Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract to the extent such amount reduces the guaranteed amount. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.
  - (2) Consult Table III or VII (whichever is applicable) of [§ 1.72-9](/cfr/26/1.72-9.md) for the appropriate percentage under the whole number of years found in [subparagraph (1)](#b-1) of this paragraph and the age (as of the annuity starting date) and, if applicable, sex of the annuitant.
  - (3) Multiply the percentage found in [subparagraph (2)](#b-2) of this paragraph by whichever of the following is the smaller: (i) The investment in the contract found in accordance with § [1.72-6](/cfr/26/1.72-6.md) or [(ii)](/cfr/26/1.72-6.md?p=ii) the total amount guaranteed as of the annuity starting date.
  - (4) Subtract the amount found in [subparagraph (3)](#b-3) of this paragraph from the investment in the contract found in accordance with [§ 1.72-6](/cfr/26/1.72-6.md).
- (c) **Adjustment of investment for the refund feature in the case of a joint and survivor annuity.**
  - (1) Except as provided in [paragraph (c)(2)](#c-2) of this section, if a joint and survivor annuity contract described in [paragraph (b)](#b) (1), (2) or (6) of [§ 1.72-5](/cfr/26/1.72-5.md) contains a refund feature and the special rule of [paragraph (d)](#d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:
    - (i) **Find the percentage determined under the following formula—**
    - (ii) Multiply the percentage found in [paragraph (c)(1)(i)](#c-1-i) of this section by the lesser of (A) the investment in the contract found in accordance with § [1.72-6](/cfr/26/1.72-6.md), or [(B)](/cfr/26/1.72-6.md?p=B) the total amount guaranteed as of the annuity starting date.
    - (iii) Subtract the amount found in [paragraph (c)(1)(ii)](#c-1-ii) of this section from the investment in the contract found in accordance with [§ 1.72-6](/cfr/26/1.72-6.md).
  - (2) If the multiples in Tables I through IV of [§ 1.72-9](/cfr/26/1.72-9.md) are used to determine any portion of the expected return under a contract described in [paragraph (c)(1)](#c-1) of this section, only the post-June 1986 investment in the contract (if any) shall be adjusted in the manner described in [paragraph (c)(1)](#c-1) of this section, and the pre-July 1986 investment in the contract shall, in the case of a contract described in [paragraph (b)](#b) (1) or (6) of [§ 1.72-5](/cfr/26/1.72-5.md), be adjusted in the following manner:
    - (i) Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.
    - (ii) Consult Table III of [§ 1.72-9](/cfr/26/1.72-9.md) for the appropriate percentages under the whole number of years found in subdivision (i) of this subparagraph and the age (as of the annuity starting date) and sex of each annuitant. If the annuitants are not of the same sex, substitute for the female annuitant a male annuitant 5 years younger, or for the male annuitant a female annuitant 5 years older, so that Table III will be entered in both cases with the ages of annuitants of the same sex.
    - (iii) **Find the sum of the two percentages found in accordance with subdivision (ii) of this subparagraph.**
    - (iv) To the age of the elder of the two annuitants (as determined under subdivision (ii) of this subparagraph), add the number of years (indicated in the table below) opposite the number of years by which such annuitants' ages differ:
    - (v) Consult Table III for the appropriate percentage under the whole number of years found in subdivision (i) of this subparagraph and the age and sex of the elder annuitant as adjusted under subdivision (iv) of this subparagraph.
    - (vi) Subtract the percentage obtained in subdivision (v) of this subparagraph from the sum of the percentages found under subdivision (iii) of this subparagraph. If the result is less than one, subdivisions (vii) and (viii) of this subparagraph shall be disregarded and no adjustment made to the investment in the contract.
    - (vii) Multiply the percentage found in subdivision (vi) of this subparagraph by whichever of the following is the smaller: (A) the investment in the contract found in accordance with § [1.72-6](/cfr/26/1.72-6.md) or [(B)](/cfr/26/1.72-6.md?p=B) the total amount guaranteed as of the annuity starting date.
    - (viii) Subtract the amount found in subdivision (vii) of this subparagraph from the investment in the contract found in accordance with [§ 1.72-6](/cfr/26/1.72-6.md).
  - (3) The principles of this [paragraph (c)](#c) may be illustrated by the following examples:
  - (4) If an annuity described in [paragraph (b)](/cfr/26/1.72-5.md?p=b) of § 1.72-5 contains a refund feature and the manner of determining the adjustment to the investment in the contract (or to any part of such investment) is not prescribed or requires use of the formula in [paragraph (c)(1)(i)](#c-1-i) of this section, the Commissioner will determine the amount of the adjustment upon request. The request must contain the date of birth of each annuitant, the guaranteed amount, the annual annuity payable to each annuitant, and the annuity starting date. Send the request to the Commissioner of Internal Revenue, Attention: OP:E:EP:GA, Washington, D.C. 20224.
- (d) **Adjustment of investment in the contract where paragraph (b)(3) of § 1.72-2 applies to payments.**
  - (1) If [paragraph (b)(3)](/cfr/26/1.72-2.md?p=b-3) of § 1.72-2 applies to payments to be made under a contract and this section also applies because of the provision for a refund feature, an adjustment shall be made to the investment in the contract in accordance with this paragraph before making the computations required by [paragraph (d)(3)](/cfr/26/1.72-4.md?p=d-3) of § 1.72-4 and [paragraph (d)(7)](/cfr/26/1.72-5.md) of § 1.72-5. In the case of the guarantee of a specified amount, the adjustment shall be made by applying the appropriate multiple from Table III or VII (whichever is applicable), as otherwise determined under this section, to the investment in the contract or the guranteed amount, whichever is the lesser. The guarantee period shall be found by dividing the amount guaranteed by the amount determined by placing the payments received during the first taxable year (to guaranteed amount) on an annual basis. Thus, if monthly payments are first received by a taxpayer on a calendar year basis in August, his total payments (to the extent that they reduce the guaranteed amount) for the taxable year would be divided by 5 and multiplied by 12. The guaranteed amount would then be divided by the result of this computation to obtain the guarantee period. If the contract merely guarantees that proceeds from a unit or units of a fund shall be paid for a fixed number of years or the life (or lives) of an annuitant (or annuitants), whichever is the longer, the fixed number of years is the guarantee period. The appropriate percentage in Table III or VII shall be applied to whichever of the following is the smaller: (i) the investment in the contract; or (ii) the product of the payments received in the first taxable year, placed on an annual basis, multiplied by the number of years for which payment of the proceeds of a unit or units is guaranteed.
  - (2) The principles of this paragraph may be illustrated by the following examples:
- (e) **Adjustment of the investment in the contract where more than one annuity element is provided for a single consideration.** In the case of contracts to which [paragraph (b)](/cfr/26/1.72-6.md?p=b) of § 1.72-6 applies for the purpose of allocating the investment in the contract to two or more annuity elements which are provided for a single consideration, if one or more of such elements involves a refund feature, the portion of the investment in the contract properly allocable to each such element shall be adjusted for the refund feature before aggregating all the investments in order to obtain the exclusion ratio which is to apply to the contract as a whole.
- (f) **Adjustment of investment in the contract with respect to contracts subject to § 1.72-6(d).** In the case of a contract to which [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this section is applied in the manner prescribed in [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) and, in particular, [§ 1.72-6(d)(5)(vi)](/cfr/26/1.72-6.md?p=d-5-vi).

# §1.72-8. Effect of certain employer contributions with respect to premiums or other consideration paid or contributed by an employee.

- (a) **Contributions in the nature of compensation—**
  - (1) **Amounts includible in gross income of employee under subtitle A of the Code or prior income tax laws.** [Section 72(f)](/cfr/26/72.md?p=f) provides that for the purposes of section [72 (c)](/cfr/26/72.md?p=c), [(d)](/cfr/26/72.md?p=d), and [(e)](/cfr/26/72.md?p=e), amounts contributed by an employer for the benefit of an employee or his beneficiaries shall constitute consideration paid or contributed by the employee to the extent that such amounts were includible in the gross income of the employee under subtitle A of the Code or prior income tax laws. Amounts to which this paragraph applies include, for example, contributions made by an employer to or under a trust or plan which fails to qualify under the provisions of [section 401(a)](/cfr/26/401.md?p=a), provided that the employee's rights to such contributions are nonforfeitable at the time the contributions are made. See sections [402(b)](/cfr/26/402.md?p=b) and [403(c)](/cfr/26/403.md?p=c) and the regulations thereunder. This subparagraph also applies to premiums paid by an employer (other than premiums paid on behalf of an owner-employee) for life insurance protection for an employee if such premiums are includible in the gross income of the employee when paid. See [§ 1.72-16](/cfr/26/1.72-16.md). However, such premiums shall only be considered as premiums and other consideration paid by the employee with respect to any benefits attributable to the contract providing the life insurance protection. See [§ 1.72-16](/cfr/26/1.72-16.md).
  - (2) **Amounts not includible in gross income of employee at time contributed if paid directly to employee at that time.** Except as provided in [subparagraph (3)](#a-3) of this paragraph, [section 72(f)](/cfr/26/72.md?p=f) provides that for the purposes of section [72 (c)](/cfr/26/72.md?p=c), [(d)](/cfr/26/72.md?p=d), and [(e)](/cfr/26/72.md?p=e), amounts contributed by an employer for the benefit of an employee or his beneficiaries shall constitute consideration paid or contributed by the employee to the extent that such amounts would not have been includible in the gross income of the employee at the time contributed had they been paid directly to the employee at that time. Amounts to which this subparagraph applies include, for example, contributions made by an employer after December 31, 1950, and before January 1, 1963, if made on account of foreign services rendered by an employee during a period in which the employee qualified as a bona fide resident of a foreign country under section 911(a) of the Internal Revenue Code of 1954, or under section 116(a) of the Internal Revenue Code of 1939. In such a case, it would be immaterial whether such contributions were made under a qualified plan or otherwise. See [subparagraph (4)](#a-4) of this paragraph for rules governing the determination of the amount of employer foreign service contributions to which this subparagraph applies. On the other hand, if contributions are made by an employer to a qualified plan at a time when compensation paid directly to the employee concerned with respect to the same services rendered would have been includible in the gross income of the employee, such as in the case of an employee of a State government where contributions are made in 1955 with respect to services rendered by the employee prior to the year 1939, this subparagraph does not apply to such contributions.
  - (3) **Limitation—**
    - (i) **In general.** Except as provided in subdivision (ii) of this subparagraph, the provisions of [subparagraph (2)](#a-2) of this paragraph shall not apply to amounts which were contributed by the employer after December 31, 1962, and which would not have been includible in the gross income of the employee by reason of the application of [section 911](/cfr/26/911.md), if such amounts had been paid directly to the employee at the time of contribution. Employer contributions attributable to foreign services performed by the employee after December 31, 1962, do not constitute, for purposes of section [72 (c)](/cfr/26/72.md?p=c), [(d)](/cfr/26/72.md?p=d), and [(e)](/cfr/26/72.md?p=e), consideration paid or contributed by the employee.
    - (ii) **Exception.** The provisions of subdivision (i) of this subparagraph shall not apply to amounts which were contributed by the employer to provide pension or annuity credits (determined in accordance with the provisions of [subparagraph (4)](#a-4) of this paragraph) to the extent such credits are—

      (a) Attributable to foreign services performed before January 1, 1963, with respect to which the employee qualified for the benefits of [section 911(a)](/cfr/26/911.md?p=a) (or corresponding provisions of prior revenue laws), and

      (b) Provided pursuant to pension or annuity plan provisions in existence on March 12, 1962, and on that date applicable to such services.

  - (4) **Determination of employer foreign service contributions which constitute consideration paid or contributed by employee.** For purposes of subparagraphs [(2)](#a-2) and [(3)(ii)](#a-3-ii) of this paragraph, employer foreign service contributions which constitute, for purposes of section [72 (c)](/cfr/26/72.md?p=c), [(d)](/cfr/26/72.md?p=d), and [(e)](/cfr/26/72.md?p=e), consideration paid or contributed by the employee shall be determined as follows:
    - (i) **Treatment of identifiable contributions.** If, under the terms of the pension or annuity plan under which employer contributions were made, such contributions may be identified as—

      (a) Attributable to foreign services performed before January 1, 1963, with respect to which the employee qualified for the benefits of [section 911(a)](/cfr/26/911.md?p=a) (or corresponding provisions of prior revenue laws), and

      (b) Made under pension or annuity plan provisions in existence on March 12, 1962, which were applicable to the services referred to in (a) of this subdivision on that date,

    - (ii) **Alternative rule for unidentifiable contributions.** If employer contributions may not be identified in the manner described in subdivision (i) of this subparagraph, the amount of employer contributions attributable to foreign services performed before January 1, 1963, and considered paid or contributed by the employee shall be determined on the basis of an estimated allocation which is reasonable and consistent with the circumstances and the provisions of the pension or annuity plan under which such contributions are made. For example, if an employee's benefits under a pension or annuity plan, which is unchanged after March 12, 1962, are determined with respect to his basic compensation during his entire period of credited service, the amount of employer contributions considered paid or contributed by the employee shall be an amount which bears the same ratio to total employer contributions for such employee under the pension or annuity plan as his basic compensation attributable to foreign services performed before January 1, 1963, with respect to which he qualified for the benefits of [section 911(a)](/cfr/26/911.md?p=a) (or corresponding provisions of prior revenue laws) bears to his total basic compensation. On the other hand, if an employee's benefits under a pension or annuity plan, which is unchanged after March 12, 1962, are determined with respect to his basic compensation during his final five years of credited service, the amount of employer contributions considered paid or contributed by the employee shall be an amount which bears the same ratio to total employer contributions for such employee as his number of years of credited service before January 1, 1963, with respect to which he qualified for the benefits of [section 911(a)](/cfr/26/911.md?p=a) (or corresponding provisions of prior revenue laws) bears to his total number of years of credited service.
  - (5) **Amounts not includible in gross income of employee under subtitle A of the Code or prior income tax laws.** Amounts contributed by an employer which were not includible in the gross income of the employee under Subtitle A of the Code or prior income tax laws, but which would have been includible therein had they been paid directly to the employee, do not constitute consideration paid or contributed by the employee for the purposes of [section 72](/cfr/26/72.md). For example, contributions made by an employer under a qualified employees' trust or plan, which contributions would have been includible in the gross income of the employee had such contributions been paid to him directly as compensation, do not constitute consideration paid or contributed by the employee. Accordingly, the aggregate amount of premiums or other consideration paid or contributed by an employee, insofar as compensatory employer contributions are concerned, consists solely of the (i) sum of all amounts actually contributed by the employee, plus (ii) contributions in the nature of compensation which are deemed to be paid or contributed by the employee under this paragraph.
- (b) **Contributions in the nature of death benefits.** In the case of an employee's beneficiary, the aggregate amount of premiums or other consideration paid or deemed to be paid or contributed by the employee shall also include:
  - (1) Amounts (other than amounts paid as an annuity) to the extent such amounts are excludable from the beneficiary's gross income as a death benefit under [section 101(b)](/cfr/26/101.md?p=b), and
  - (2) Any amount or amounts of death benefits which are treated as additional consideration contributed by the employee under [section 101(b)(2)(D)](/cfr/26/101.md?p=b-2-D) and the regulations thereunder, or which were excludable from the beneficiary's gross income as a death benefit under section 22(b)(1)(B) of the Internal Revenue Code of 1939 and the regulations thereunder.
- (c) **Amounts “made available” to an employee or his beneficiary.** Any amount which, although not actually paid, is made available to and includable in the gross income of an employee or his beneficiary under the rules of sections [402](/cfr/26/402.md) and [403](/cfr/26/403.md) and the regulations thereunder, shall be considered an amount contributed by the employee and shall be aggregated with amounts, if any, to which paragraphs [(a)](#a) and [(b)](#b) of this section apply for the purpose of determining the aggregate amount of premiums or other consideration paid by the employee.
- (d) **Amounts includable in gross income of employee when his rights under annuity contract change to nonforfeitable rights.** Any amount which, by reason of [section 403(d)](/cfr/26/403.md?p=d) and after the application of paragraph (b) of § 1.403 (b)-1, is required to be included in an employee's gross income for the year when his rights under an annuity contract change from forfeitable to nonforfeitable rights shall be considered an amount contributed by the employee and shall be aggregated with amounts, if any, to which paragraphs [(a)](#a), [(b)](#b), and [(c)](#c) of this section apply for the purpose of determining the aggregate amount of premiums or other consideration paid or contributed by the employee for such annuity contract. In other words, if, under [section 403(d)](/cfr/26/403.md?p=d), an employee of an organization exempt from tax under section [501(a)](/cfr/26/501.md?p=a) or [521(a)](/cfr/26/521.md?p=a) is required to include an amount in gross income by reason of his rights under an annuity contract changing from forfeitable to nonforfeitable rights, such amount, to the extent it is not excludable from gross income under paragraph (b) of § 1.403 (b)-1, shall be considered an amount contributed by such employee for the annuity contract.

# §1.72-9. Tables.


The following tables are to be used in connection with computations under [section 72](/cfr/26/72.md) and the regulations thereunder. Tables I, II, IIA, III, and IV are to be used if the investment in the contract does not include a post-June 1986 investment in the contract (as defined in [§ 1.72-6(d)(3)](/cfr/26/1.72-6.md?p=d-3)). Tables V, VI, VIA, VII, and VIII are to be used if the investment in the contract includes a post-June 1986 investment in the contract (as defined in [§ 1.72-6(d)(3)](/cfr/26/1.72-6.md?p=d-3)).

In the case of a contract under which amounts are received as an annuity after June 30, 1986, a taxpayer receiving such amounts may elect to treat the entire investment in the contract as post-June 1986 investment in the contract and thus apply Tables V through VIII. A taxpayer may make the election for any taxable year in which such amounts are received by attaching to the taxpayer's return for such taxable year a statement that the taxpayer is electing under § 1.72-9 to treat the entire investment in the contract as post-June 1986 investment in the contract. The statement must contain the taxpayer's name, address, and taxpayer identification number. The election is irrevocable and applies with respect to all amounts that the taxpayer receives as an annuity under the contract in the taxable year for which the election is made or in any subsequent taxable year. (Note that for purposes of the examples in [§§ 1.72-4 through 1.72-11](/cfr/26/1.72-4..1.72-11.md) the election described in this section is disregarded (i.e., it assumed that the taxpayer does not make an election under this section).) See also [§ 1.72-6(d)(3)](/cfr/26/1.72-6.md?p=d-3) for rules treating the entire investment in a contract as post-June 1986 investment in a contract if the annuity starting date of the contract is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract. In addition, see [§ 1.72-6(d)](/cfr/26/1.72-6.md?p=d) for special rules concerning the tables to be used and the separate computations required if the investment in the contract includes both a pre-July 1986 investment in the contract and a post-June 1986 investment in the contract and the election described in [§ 1.72-6(d)(6)](/cfr/26/1.72-6.md?p=d-6) is made with respect to the contract.


# §1.72-10. Effect of transfer of contracts on investment in the contract.

- (a) If a contract to which [section 72](/cfr/26/72.md) applies, or any interest therein, is transferred for a valuable consideration, by assignment or otherwise, only the actual value of the consideration given for such transfer and the amount of premiums or other consideration subsequently paid by the transferee shall be included in the transferee's aggregate of premiums or other consideration paid. In accordance with the provisions of [section 72(g)(3)](/cfr/26/72.md?p=g-3) and [paragraph (b)](/cfr/26/1.72-4.md?p=b) of § 1.72-4, an annuity starting date shall be determined for the transferee without regard to the annuity starting date, if any, of the transferor. In determining the transferee's investment in the contract, the aggregate amount of premiums or other consideration paid shall be reduced by all amounts received by the transferee before the receipt of an amount as an annuity or before the annuity starting date, whichever is the later, to the extent that such amounts were excludable from his gross income under the applicable income tax law at the time of receipt. For the treatment of amounts received by the transferee subsequent to both the annuity starting date and the date of receipt of a payment as an annuity, but not received as annuity payments, see [§ 1.72-11](/cfr/26/1.72-11.md). For a limitation on adjustments to the basis of annuity contracts sold, see [section 1021](/cfr/26/1021.md).
- (b) In the case of a transfer of such a contract without valuable consideration, the annuity starting date and the expected return under the contract shall be determined as though no such transfer had taken place. See [paragraph (b)](/cfr/26/1.72-4.md?p=b) of § 1.72-4. The transferee shall include the aggregate of premiums or other consideration paid or deemed to have been paid by his transferor in the aggregate of premiums or other consideration as though paid by him. In determining the transferee's investment in the contract, the transferee's aggregate amount of premiums or other consideration paid (as so found) shall be reduced by all amounts either received or deemed to have been received by himself or his transferor before the annuity starting date, or before the date on which an amount is first received as an annuity, whichever is the later, to the extent that such amounts were excludable from the gross income of the actual recipient under the applicable income tax law at the time of receipt. For treatment of amounts received subsequent to both the above dates by such transferee, but not received as annuity payments, see [§ 1.72-11](/cfr/26/1.72-11.md).

# §1.72-11. Amounts not received as annuity payments.

- (a) **Introductory.**
  - (1) This section applies to amounts received under a contract to which [section 72](/cfr/26/72.md) applies if either:
    - (i) [Paragraph (b)](/cfr/26/1.72-2.md?p=b) of § 1.72-2 is inapplicable to such amounts.
    - (ii) [Paragraph (b)](/cfr/26/1.72-2.md?p=b) of § 1.72-2 is applicable but the annuity payments received differ either in amount, duration, or both, from those originally provided under the contract, or
    - (iii) Paragraph (b) of § 1.72 is applicable, but such annuity payments are received by a beneficiary after the death of an annuitant (or annuitants) in full discharge of the obligation under the contract and solely because of a guarantee.
  - (2) The principles of this section apply, to the extent appropriate thereto, to amounts paid which are taxable under [section 72](/cfr/26/72.md) (except, for taxable years beginning before January 1, 1964, [section 72(e)(3)](/cfr/26/72.md?p=e-3)) in accordance with sections [402](/cfr/26/402.md) and [403](/cfr/26/403.md) and the regulations thereunder. However, if contributions used to purchase the contract include amounts for which a deduction was allowed under [section 404](/cfr/26/404.md) as contributions on behalf of an owner-employee, the rules of this section are modified by the rules of [paragraph (b)](/cfr/26/1.72-17.md?p=b) of § 1.72-17. Further, in applying the provisions of this section, the aggregate premiums or other consideration paid shall not include contributions on behalf of self-employed individuals to the extent that deductions were allowed under [section 404](/cfr/26/404.md) for such contributions. Nor, shall the aggregate of premiums or other consideration paid include amounts used to purchase life, accident, health, or other insurance protection for an owner-employee. See [paragraph (b)(4)](/cfr/26/1.72-16.md?p=b-4) of § 1.72-16 and [paragraph (c)](/cfr/26/1.72-17.md?p=c) of § 1.72-17. The principles of this section also apply to payments made in the manner described in [paragraph (b)(3)(i)](/cfr/26/1.72-2.md?p=b-3-i) of § 1.72-2.
- (b) **Amounts received in the nature of dividends or similar distributions.**
  - (1) If dividends (or payments in the nature of dividends or a return of premiums or other consideration) are received under a contract to which [section 72](/cfr/26/72.md) applies and such payments are received before the annuity starting date or before the date on which an amount is first received as an annuity, whichever is the later, such payments are includible in the gross income of the recipient only to the extent that they, taken together with all previous payments received under the contract which were excludable from the gross income of the recipient under the applicable income tax law, exceed the aggregate of premiums or other consideration paid or deemed to have been paid by the recipient. Such payments shall also be subtracted from the consideration paid (or deemed paid) both for the purpose of determining an exclusion ratio to be applied to subsequent amounts paid as an annuity and for the purpose of determining the applicability of [section 72(d)](/cfr/26/72.md?p=d) and [§ 1.72-13](/cfr/26/1.72-13.md), relating to employee contributions recoverable in three years.
  - (2) If dividends or payments in the nature of dividends are paid under a contract to which [section 72](/cfr/26/72.md) applies and such payments are received on or after the annuity starting date or the date on which an amount is first received as an annuity, whichever is later, such payments shall be fully includible in the gross income of the recipient. The receipt of such payments shall not affect the aggregate of premiums or other consideration paid nor the amounts contributed or deemed to have been contributed by an employee as otherwise calculated for purposes of [section 72](/cfr/26/72.md). Since the investment in the contract and the expected return are not affected by a payment which is fully includible in the gross income of the recipient under this rule, the exclusion ratio will not be affected by such payment and will continue to be applied to amounts received as annuity payments in the future as though such payment had not been made. This subparagraph shall apply to amounts received under a contract described in [paragraph (b)(3)(i)](/cfr/26/1.72-2.md?p=b-3-i) of § 1.72-2 to the extent that the amounts received exceed the portion of the investment in the contract allocable to each taxable year in accordance with [paragraph (d)(3)](/cfr/26/1.72-4.md?p=d-3) of § 1.72-4. Hence, such excess is fully includible in the gross income of the recipient.
- (c) **Amounts received in the nature of a refund of the consideration under a contract and in full discharge of the obligation thereof.**
  - (1) Any amount received under a contract to which [section 72](/cfr/26/72.md) applies, if it is at least in part a refund of the consideration paid, including amounts payable to a beneficiary after the death of an annuitant by reason of a provision in the contract for a life annuity with minimum period of payments certain or with a minimum amount which must be paid in any event, shall be considered an amount received in the nature of a refund of the consideration paid for such contract. If such an amount is in full discharge of an obligation to pay a fixed amount (whether in a lump sum or otherwise) or to pay amounts for a fixed number of years (including amounts described in [paragraph (b)(3)(i)](/cfr/26/1.72-2.md?p=b-3-i) of § 1.72-2), it shall be included in the gross income of the recipient only to the extent that it, when added to amounts previously received under the contract which were excludable from gross income under the law applicable at the time of receipt, exceeds the aggregate of premiums or other consideration paid. See [section 73(e)(2)(A)](/cfr/26/73.md?p=e-2-A). This paragraph shall not apply if the total of the amounts to be paid in discharge of the obligation can in any event exceed the total of the annuity payments which would otherwise fully discharge the obligation. For rules to be applied in such a case, see [paragraph (e)](#e) of this section.
  - (2) The principles of [subparagraph (1)](#c-1) of this paragraph may be illustrated by the following examples:
  - (3) For the purpose of applying the rule contained in [subparagraph (1)](#c-1) of this paragraph, it is immaterial whether the recipient of the amount received in full discharge of the obligation is the same person as the recipient of amounts previously received under the contract which were excludable from gross income, except in the case of a contract transferred for a valuable consideration, with respect to which see [paragraph (a)](/cfr/26/1.72-10.md?p=a) of § 1.72-10. For the limit on the tax, for taxable years beginning before January 1, 1964, attributable to the receipt of a lump sum to which this paragraph applies, see [paragraph (g)](#g) of this section.
- (d) **Amounts received upon the surrender, redemption, or maturity of a contract.**
  - (1) Any amount received upon the surrender, redemption, or maturity of a contract to which [section 72](/cfr/26/72.md) applies, which is not received as an annuity under the regulations of [paragraph (b)](/cfr/26/1.72-2.md?p=b) of § 1.72-2, 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. See [section 72(e)(2)(B)](/cfr/26/72.md?p=e-2-B). If amounts are to be received as an annuity, whether in lieu of or in addition to amounts described in the preceding sentence, such amounts shall be included in the gross income of the recipient in accordance with the provisions of paragraph [(e)](#e) or [(f)](#f) of this section, whichever is applicable. The rule stated in the first sentence of this paragraph shall not apply to payments received as an annuity or otherwise after the date of the first receipt of an amount as an annuity subsequent to the maturity, redemption, or surrender of the original contract. If amounts are so received and are other than amounts received as an annuity, they are includible in the gross income of the recipient. See [section 72(e)(1)(A)](/cfr/26/72.md?p=e-1-A) and [paragraph (b)(2)](#b-2) of this section.
  - (2) For the purpose of applying the rule contained in [subparagraph (1)](#d-1) of this paragraph, it is immaterial whether the recipient of the amount received upon the surrender, redemption, or maturity of the contract is the same as the recipient of amounts previously received under the contract which were excludable from gross income, except in the case of a contract transferred for a valuable consideration, with respect to which see [paragraph (a)](/cfr/26/1.72-10.md?p=a) of § 1.72-10. For the limit on the amount of tax, for taxable years beginning before January 1, 1964, attributable to the receipt of certain lump sums to which this paragraph applies, see [paragraph (g)](#g) of this section.
- (e) **Periodic payments received for a different term.** If, after the date on which an amount is first received as an annuity under a contract to which [section 72](/cfr/26/72.md) applies, the terms of the contract are modified or the annuity obligations are exchanged so that periodic payments are to be received for a different term than originally provided under the contract (whether or not accompanied by the receipt of a lump sum to which [paragraph (d)](#d) of this section applies), the rules of this paragraph shall apply to such payments. Hence, the provisions of [section 72(e)](/cfr/26/72.md?p=e) and paragraphs [(b)](#b), [(c)](#c), [(d)](#d), and [(f)](#f) of this section are inapplicable for the purpose of determining the includibility of such payments in gross income and the general principles of [section 72](/cfr/26/72.md) with respect to the use of an exclusion ratio shall be applied to such payments as if they were provided under a new contract received in exchange for the contract providing the original annuity payments. If such payments are received as the result of the surrender, redemption, or discharge of a contract to which [section 72](/cfr/26/72.md) applies, they shall be considered to be received as an annuity under a contract exchanged for the contract whose redemption, surrender, or discharge was involved. For the purpose of determining the extent to which the payments so received are to be included in the gross income of the recipient, an exclusion ratio shall be determined for such contract as of the later of January 1, 1954, or the first day of the first period for which an amount is received as an annuity thereunder, whichever is the later. See [paragraph (b)](/cfr/26/1.72-4.md?p=b) of § 1.72-4. In determining the investment in the contract for this purpose, any lump sum amount received at the time of the exchange shall not be considered an amount to which [paragraph (a)(2)](/cfr/26/1.72-6.md?p=a-2) of § 1.72-6 applies. However, such lump sum shall be subtracted from the aggregate of premiums or other consideration paid to the extent it is excludable as an amount not received as an annuity under this section as if it were an amount received before the annuity starting date of the contract obtained in exchange.
- (f) **Periodic payments received for the same term after a lump sum withdrawal.**
  - (1) If, after the date of the first receipt of a payment as an annuity, the annuitant receives a lump sum and is thereafter to receive annuity payments in a reduced amount under the contract for the same term, life, or lives as originally specified in the contract, a portion of the contract shall be considered to have been surrendered or redeemed in consideration of the payment of such lump sum and the exclusion ratio originally determined for the contract shall continue to apply to the amounts received as an annuity without regard to the fact that such amounts are less than the original amounts which were to be paid periodically. The lump sum shall be includible in the gross income of the recipient in accordance with the provisions of [subparagraph (2)](#f-2) of this paragraph. However, except in the case of amounts to which sections [402](/cfr/26/402.md) and [403](/cfr/26/403.md) apply, the tax, for taxable years beginning before January 1, 1964, attributable to the inclusion of all or part of the lump sum in gross income shall not exceed the amount determined under [section 72(e)(3)](/cfr/26/72.md?p=e-3) and [paragraph (g)](#g) of this section. For taxable years beginning after December 31, 1963, such amounts may be taken into account in computations under [sections 1301 through 1305](/cfr/26/1301..1305.md) (relating to income averaging).
  - (2) There shall be excluded from gross income that portion of the lump sum which bears the same ratio to the aggregate premiums or other consideration paid for the contract, as reduced by all amounts previously received under the contract and excludable from the gross income of the recipient under the applicable income tax law, as:
    - (i) In the case of payments to be made in the manner described in [paragraph (b)(2)](/cfr/26/1.72-2.md?p=b-2) of § 1.72-2, the amount of the reduction in the annuity payments to be made thereafter bears to the annuity payments originally provided under the contract, or
    - (ii) In the case of a contract providing for payments to be made in the manner described in [paragraph (b)(3)(i)](/cfr/26/1.72-2.md?p=b-3-i) of § 1.72-2, the amount of the reduction in the number of units per period to be paid thereafter bears to the number of units per period payable under the contract immediately before the lump sum withdrawal.
  - (3) This paragraph may be illustrated by the following examples:
- (g) **Limit on tax attributable to the receipt of a lump sum.**
  - (1) For taxable years beginning before January 1, 1964, if the entire amount of the proceeds received upon the redemption, maturity, surrender, or discharge of a contract to which [section 72](/cfr/26/72.md) applies is received in a lump sum and paragraph [(c)](#c), [(d)](#d), or [(f)](#f) of this section is applicable in determining the portion of such amount which is includible in gross income, the tax attributable to such portion shall not exceed the tax which would have been attributable thereto had such portion been received ratably in the taxable year in which received and the 2 preceding taxable years. The amount of tax attributable to the includible portion of the lump sum received shall be the lesser of:
    - (i) The difference between the amount of tax for the taxable year of receipt computed by including such portion in gross income and the amount of tax for such taxable year computed by excluding such portion from gross income; or
    - (ii) The difference between the total amount of tax for the taxable year of receipt and the 2 preceding taxable years computed by including one-third of such portion in gross income for each of the 3 taxable years, and the total amount of the tax for the taxable year of receipt and the 2 preceding taxable years computed by entirely excluding such portion from the gross income of all 3 taxable years.
  - (2) For taxable years beginning after December 31, 1963, any amount includible in gross income to which this section relates may be taken into account in computations under [sections 1301 through 1305](/cfr/26/1301..1305.md) (relating to income averaging).
- (h) **Amounts deemed to be paid or received by a transferee.** Amounts deemed to have been paid or received by a transferee for the purposes of [§ 1.72-10](/cfr/26/1.72-10.md) shall also be deemed to have been so paid or received by such transferee for the purposes of this section. Thus, if a donee is deemed to have paid the premiums or other consideration actually paid by his transferor for the purposes of [section 72(g)](/cfr/26/72.md?p=g) and [paragraph (b)](/cfr/26/1.72-10.md?p=b) of § 1.72-10, such consideration shall be deemed premiums or other consideration paid by the donee for the purposes of this section.