Complete Home & Office Legal Guide/Complete Home and Office Legal Guide (Chestnut) (1993).ISO/stat/fed/irc9.asc

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63.  Taxable income defined
(a)  In general. -- Except as provided in subsection (b), for
purposes of this subtitle, the term "taxable income" means gross
income minus the deductions allowed by this chapter (other than
the standard deduction).
(b)  Individuals who do not itemize their deductions. -- In the
case of an individual who does not elect to itemized his
deductions for the taxable year, for purposes of this subtitle,
the term "taxable income" means adjusted gross income, minus --
(1)  the standard deduction, and
(2)  the deduction for personal exemptions provided in section
151.
(c)  Standard deduction. -- For purposes of this subtitle --
(1)  In general. -- Except as otherwise provided in this
subsection, the term "standard deduction" means the sum of --
(A)  the basic standard deduction, and
(B)  the additional standard deduction.
(2)  Basic standard deduction. -- For purposes of paragraph (1),
the basic standard deduction is --
(A)  $5,000 in the case of --
(i)  a joint return, or
(ii)  a surviving spouse (as defined in section 2(a)),
(B)  $4,000 in the case of a head of household (as defined in
section 2(b)),
(C)  $3,000 in the case of an individual who is not married and
who is not a surviving spouse or head of household, or
(D)  $2,500 in the case of a married individual filing a separate
return.
(3)  Additional standard deduction for aged and blind. -- For
purposes of paragraph (1), the additional standard deduction is
the sum of each additional amount to which the taxpayer is
entitled under subsection (f).
(4)  Adjustments for inflation. -- In the case of any taxable
year beginning in a calendar year after 1988, each dollar amount
contained in paragraph (2) or (5)(A) or subsection (f) shall be
increased by an amount equal to --
(A)  such dollar amount, multiplied by
(B)  the cost-of-living adjustment determined under section
1(f)(3) for the calendar year in which the taxable year begins,
by substituting "calendar year 1987" for "calendar year 1989" in
subparagraph (B) thereof.
(5)  Limitation on basic standard deduction in the case of
certain dependents. -- In the case of an individual with respect
to whom a deduction under section 151 is allowable to another
taxpayer for a taxable year beginning in the calendar year in
which the individual's taxable year begins, the basic standard
deduction applicable to such individual for such individual's
taxable year shall not exceed the greater of --
(A)  $500, or
(B)  such individual's earned income.
(6)  Certain individuals, etc., not eligible for standard
deduction. -- In the case of --
(A)  a married individual filing a separate return when either
spouse itemizes deductions,

(B)  A nonresident alien individual,
(C)  an individual making a return under section 443(a)(1) for a
period for less than 12 months on account of a change in his
annual accounting period, or
(D)  an estate or trust, common trust fund, or partnership,
the standard deduction shall be zero.
(d)  Itemized deductions. -- For purposes of this subtitle, the
term "itemized deductions" means the deductions allowable under
this chapter other than --
(1)  the deductions allowable in arriving at adjusted gross
income, and
(2)  the deduction for personal exemptions provided by section
151.
(e)  Election to itemize. --
(1)  In general. -- Unless an individual makes an election under
this subsection for the taxable year, no itemized deduction shall
be allowed for the taxable year.  For purposes of this subtitle,
the determination of whether a deduction is allowable under this
chapter shall be made without regard to the preceding sentence.
(2)  Time and manner of election. -- Any election under this
subsection shall be made on the taxpayer's return, and the
Secretary shall prescribe the manner of signifying such election
on the return.
(3)  Change of election. -- Under regulations prescribed by the
Secretary, a change of election with respect to itemized
deductions for any taxable year may be  made after the filing of
the return for such year.  If the spouse of the taxpayer filed a
separate return for any taxable year corresponding to the taxable
year of the taxpayer, the change shall not be allowed unless, in
accordance with such regulations ---
(A)  the spouse makes a change of election with respect to
itemized deductions, for the taxable year covered in such
separate return, consistent with the change of treatment sought
by the taxpayer, and
(B)  the taxpayer and his spouse consent in writing to the
assessment (within such period as may be agreed on with the
Secretary) of any deficiency, to the extent attributable to such
change of election, even though at the time of the filing of such
consent the assessment of such deficiency would otherwise be
prevented by the operation of any law or rule of law.
This paragraph shall not apply if the tax liability of the
taxpayer's spouse for the taxable year corresponding to the
taxable year of the taxpayer has been compromised under section
7122.
(f)  Aged or blind additional amounts. --
(1)  Additional amounts for the aged. --- The taxpayer shall be
entitled to an additional amount of $600 --
(A)  for himself if he has attained age 65 before the close of
his taxable year, and
(B)  for the spouse of the taxpayer if the spouse has attained
age 65 before the close of the taxable year and an additional
exemption is allowable to the taxpayer for such spouse under
section 151(b),
(2)  Additional amount for blind. -- The taxpayer shall be
entitled to an additional amount of $600 --
(A)  for himself if he is blind at the close of the taxable year,
and
(B)  for the spouse of the taxpayer if the spouse is blind as of
the close of the taxable year and an additional exemption is
allowable to the taxpayer for such spouse under section 151(b).
For purposes of subparagraph (B), if the spouse dies during the
taxable year the determination of whether such spouse is blind
shall be made as of the time of such death.
(3)  Higher amount for certain unmarried individuals. -- In the
case of an individual who is not married and is not a surviving
spouse, paragraphs (1) and (2) shall be applied by substituting
"$750" for "$600".
(4)  Blindness defined. -- For purposes of this subsection,
an individual is blind only if his central visual acuity does not
exceed 20/200 in the better eye with correcting lenses, or if his
visual acuity is greater than 20/200 but is accompanied by a
limitation in the fields of vision such that the widest diameter
of the visual field subtends an angle no greater than 20 degrees.
(g)  Marital status. -- For purposes of this section, marital
status shall be determined under section 7703.

64.  Ordinary income defined
For purposes of this subtitle, the term "ordinary income"
includes any gain form the sale or exchange of property which is
nether a capital asset nor property described in section 1231(b).
Any gain form the sale or exchange of property which is treated
or considered, under other provisions of this subtitle, as
"ordinary income" shall be treated as gain form the sale or
exchange of property which is neither a capital asset nor
property described in section 1231(b).

65.  Ordinary loss defined
For purposes of this subtitle, the term "ordinary loss" includes
any loss from the sale or exchange of property which is not a
capital asset.  Any loss form the sale or exchange of property
which is treated or considered, under other provisions of this
subtitle, as "ordinary loss" shall be treated as loss from the
sale or exchange of property which is not a capital asset.

66.  Treatment of community income
(a)  Treatment of community income wher spouses live apart. -- If
--
(1)  2 individuals are married to each other at any time during a
calendar year;
(2)  such individuals --
(A)  live apart at all times during the calendar year, and
(B)  do not file a joint return under section 6013 with each
other for a taxable year beginning or ending in the calendar
year;
(3)  one or both of such individuals have earned income for the
calendar year which is community income; and
(4)  no portion of this title, any community income of such
individuals for the calendar year shall be treated in accordance
with the rules provided by section 879(a).
(b)  Secretary may disregard community property laws where spouse
notified of community income. -- The Secretary may disallow the
benefits of any community property law to any taxpayer with
respect to any income if such taxpayer acted as if solely
entitled to such income and failed to notify the taxpayers'
spouse before the due date (including extensions) for filing the
return for the taxable year in which the income was derived of
the nature and amount of such income.
(c)  Spouse relieved of liability in certain other cases. --
Under regulations prescribed by the Secretary, if --
(1)  an individual does not file a joint return for any taxable
year,
(2)  such individual does not include in gross income for such
taxable year an item of community income property includable
therein which, in accordance with the rules contained in section
879(a), would be treated as the income of the other spouse,
(3)  the individual establishes that he or she did not know of,
and had no reason to know of, such item of community income, and
(4)  the individual establishes that he or she did not know of,
and had no reason to know of, such item of community income, and
(4)  taking into account all facts and circumstances, it is
inequitable to include such item of community income in such
individual's gross income,
then for purposes of this title, such item of community income
shall be included in the gross income of the other spouse (and
not in the gross income of the individual).
(d)  Definitions. -- For purposes of this section --
(1)  Earned income. -- The term "earned income" has the meaning
given to such term by section 911(d)(2).
(2)  Community income. -- The term "community income" means
income which, under applicable community property laws, is
treated as community income.
(3)  Community property laws. -- The term "community property
laws" means the community property laws of a State, a foreign
country, or a possession of the United States.

67.  2-percent floor on miscellaneous itemized deductions
(a) General rule. -- In the case of an individual, the
miscellaneous itemized deductions for any taxable year shall be
allowed only to the extent that the aggregate of such deductions
exceeds 2 percent of adjusted gross income.
(b)  Miscellaneous itemized deductions. -- For purposes of this
section, the term "miscellaneous itemized deductions" means the
itemized deductions other than --
(1)  the deduction under section 163 (relating to interest),
(2)  the deduction under section 164 (relating to taxes),
(3)  the deduction under section 165(a) for losses described in
subsection (c)(3) or (d) of section 165,
(4)  the deductions under section 170 (relying to charitable,
etc., contributions and gifts) and section 642(c) (relating to
deduction for amount paid or permanently set aside for a
charitable purpose),
(5)  the deduction under section 213 (relating to medical,
dental, etc., expenses),
(6)  the deduction under section 217 (relying to moving
expenses),
(7)  any deduction allowable for impairment-related work
expenses,
(8)  the deduction under section 691(c) (relating to deduction
for estate tax in case of income in respect of the decedent),
(9)  any deduction allowable in connection with personal property
used in a short sale,
(10)  the deduction under section 1341  (relating to computation
of tax where taxpayer restores substantial amount held under
claim of right),
(11)  the deduction under section 72(b)(3) (relating to deduction
where annuity payments cease before investment recovered),
(12)  the deduction under section 171 (relating to deduction for
amortizable bond premium), and
(13)  the deduction under section 216 (relating deductions in
connection with cooperative housing corporations).
(c)  Disallowance of indirect deduction through pass-thru entity.
--
(1)  In general. -- The Secretary shall prescribe regulations
which prohibit the indirect deduction through pass-thru entities
of amounts which are not allowable as a deduction if paid or
incurred directly by an individual and which contains such
reporting requirements as may be necessary to carry out the
purposes of this subsection.
(2)  Treatment of publicly offered regulated investment
companies. --
(A)  In general. -- Paragraph (1) shall not apply with respect to
any publicly offered regulated investment company.
(B)  Publicly offered regulated investment companies. -- For
purposes of this subsection --
(i)  In general. -- The term "publicly offered regulated
investment company" means a regulated investment company the
shares of which are --
(I)  continuously offered pursuant to a public offering (within
the meaning of section 4 of the Securities Act of 1933, as
amended (15 U.S.C. 77a to 77aa)),
(II)  regularly traded on an established securities market, or
(III)  held by or for no fewer than 500 persons at all times
during the taxable year.
(ii)  Secretary may reduce 500 person requirement. -- The
Secretary may by regulation decrease the minimum shareholder
requirement of clause (i)(III) in the case of regulated
investment companies which experience a loss of shareholders
through net redemptions of their shares.
(3)  Treatment of certain other entities. -- Paragraph (1) shall
not apply --
(A)  with respect to cooperatives and real estate investment
trusts, and
(B)  except as provided in regulations, with respect to estates
and trusts.
(d)  Impairment-related work expenses. -- For purposes of this
section, the term "impairment-related work expenses" means
expenses --
(1)  of a handicapped individual (as defined in section
190(b)(3)) for attendant care services at the individual's place
of employment and other expenses in connection with such place of
employment which are necessary for such individual to be able to
work, and
(2)  with respect to which a deduction is allowable under section
162 (determined without regard to this section).
(e)  Determination of adjusted gross income in case of estates
and trusts. -- For purposes of this section, the adjusted gross
income of an estate or trust shall be computed in the same manner
as in the case of an individual, except that --
(1)  the deductions for costs which are paid or incurred in
connection with the administration of the estate or trust and
which would not have been incurred if the property were not held
in such trust or estate, and
(2)  the deductions allowable under sections 642(b), 651, and
661,
shall be treated as allowable in arriving at adjusted gross
income.  Under regulations, appropriate adjustments shall be made
in the application of part I of subchapter J of this chapter to
take into account the provisions of this section.
(f)  Coordination with other limitation. -- This section shall be
applied before the application of the dollar limitation of the
last sentence of section 162(a) (relating to trade or business
expenses).

68.  Overall limitation on itemized deductions
(a)  General rule. -- In the case of an individual whose adjusted
gross income exceeds the applicable amount, the amount of the
itemized deductions otherwise allowable for the taxable year
shall be reduced by the lesser of --
(1)  3 percent of the excess of adjusted gross income over the
applicable amount, or
(2)  80 percent of the amount of the itemized deductions
otherwise allowable for such taxable year.
(b)  Applicable amount. --
(1)  In general. -- For purposes of this section, the term
"applicable amount" means $100,000 ($50,000 in the case of a
separate return by a married individual within the meaning of
section 7703).
(2)  Inflation adjustments. -- In the case of any taxable year
beginning in a calendar year after 1991, each dollar amount
contained in paragraph (1) shall be increased by an amount equal
to --
(c)  Exception for certain itemized deductions. -- For purposes
of this section, the term "itemized deductions" does not include
--
(1)  the deduction under section 213 (relating to medical, etc.
expenses).
(2)  any deduction for investment interest (as defined in section
163(d)), and
(3)  the deduction under section 165(a) for losses described in
subsection (c)(3) or (d) of section 165.
(d)  Coordination with other limitations. -- This section shall
be applied after the application of any limitation on the
allowance of any itemized deduction.
(e)  Exception for estates and trusts. -- This section shall not
apply to any estate or trust.
(f)  Termination. -- This section shall not apply to any taxable
year beginning after December 31, 1995.

71.  Alimony and separate maintenance payments
(a)  General rule. -- Gross income includes amount received as
alimony or separate maintenance payments.
(b)  Alimony or separate maintenance payments defined. -- For
purposes of this section --
(A)  In general. -- The term "alimony or separate maintenance
payment" means any payment in cash if --
(A)  such payment is received by (or on behalf of) a spouse under
a divorce or separation instrument,
(B)  the divorce or separation instrument does not designate such
payment as a payment which is not includable in gross income
under this section and not allowable as a deduction under section
215,
(C)  in the case of an individual legally separated from his
spouse under a decree of divorce or of separate maintenance, the
payee spouse and the payer spouse are not members of the same
household at the time such payment is made, and
(D)  there is no liability to make any such payment for any
period after the death of the payee spouse and there is no
liability to make any payment (in cash or property) as a
substitute for such payments after the death of the payee spouse.
(2)  Divorce or separation instrument. -- The term "divorce or
separation instrument" means --
(A)  a decree of divorce or separate maintenance or a written
instrument incident to such a decree,
(B)  a written separation agreement, or
(C)  a decree (not described in subparagraph (A)) requiring a
spouse to make payments for the support or maintenance of the
other spouse.
(c)  Payments to support children. --
(1)  In general. -- Subsection (a) shall not apply to that part
of any payment which the terms of the divorce or separation
instrument fix in terms of an amount of money or part of the
payment) as a sum which is payable for the support of children of
the payor spouse.
(2)  Treatment of certain reductions related to contingencies
involving child. -- For purposes of paragraph (1), if any amount
specified in the instrument will be reduced --
(A)  on the happening of a contingency specified in the
instrument relating to a child (such as attaining a specified
age, marrying, dying, leaving school, or a similar contingency),
or
(B)  at a time which can clearly be associated with a contingency
of a kind specified in subparagraph (A),
an amount equal to the amount of such reduction will be treated
as an amount fixed as payable for the support of children of the
payor spouse.
(3)  Special rule where payment is less than amount specified in
instrument. -- For purposes of this subsection, if any payment is
less than the amount specified in the instrument, then so much of
such payment as does not exceed the sum payable for support shall
be considered a payment for such support.
(d)  Spouse. -- For purposes of this section, the term "spouse"
includes a former spouse.
(e)  Exception for joint returns. -- This section and section 215
shall not apply if the spouses make a joint return with each
other.
(f)  Recomputation where excess front-loading of alimony
payments. --
(1)  In general. -- If there are excess alimony payments --
(A)  the payor spouse shall include the amount of such excess
payments in gross income for the payor spouse's taxable year
beginning in the 3rd post-separation year, and
(B)  the payee spouse shall be allowed a deduction in computing
adjusted gross income for the amount of such excess payments for
the payee's taxable year beginning in the 3rd post-separation
year.
(2)  Excess alimony payments. -- For purposes of this subsection,
the term "excess alimony payments" mean the sum of --
(A)  the excess payments for the 1st post-separation year, and
(B)  the excess payments for the 2nd post-separation year.
(3)  Excess payments for 1st post-separation year. -- For
purposes of this subsection, the amount of the excess payments
for the 1st post-separation year is the excess (if any) of --
(A)  the amount of the alimony or separate maintenance payments
paid by the payor spouse during the 1st post-separation year,
over
(B)  the sum of --
(i)  the average of --
(I)  the alimony or separate maintenance payments paid by the
payor spouse during the 2nd post-separation year, reduced by the
excess payments for the 2nd post-separation year, and
(II)  the alimony or separate maintenance payments paid by the
payor spouse during the 3rd post-separation year, plus
(ii)  $15,000.
(4)  Excess payments for 2nd post-separation year. -- For
purposes of this subsection, the amount of the excess payments
for the 2nd post-separation year is the excess (if any) of --
(A)  the amount of the alimony or separate maintenance payments
paid by the payor spouse during the 2nd post-separation year,
over
(B)  the sum of --
(i)  the amount of the alimony or separate maintenance payments
paid by the payor spouse during the 3rd post-separation year,
plus (ii)  $15,000.
(5)  Exceptions. --
(A)  Where payment ceases by reason of death or remarriage. --
Paragraph (1) shall not apply if --
(i)  either spouse dies before the close of the 3rd post-
separation year, or the payee spouse remarries before the close
of the 3rd post-separation year, and
(ii)  the alimony or separate maintenance payments cease by
reason of such death or remarriage.
(B)  Support payments. -- For purposes of this subsection, the
term "alimony or separate maintenance payment" shall not include
any payment received under a decree described in subsection
(b)(2)(C).
(C)  Fluctuating payments not within control of payor spouse. --
For purposes of this subsection, the term "alimony or separate
maintenance payment" shall not include any payment to the extent
it is made pursuant to a continuing liability (over a period of
not less than 3 year) to apply a fixed portion or portions of the
income from a business or property or from compensation for
employment or self-employment.
(6)  Post-separation year. -- For purposes of this subsection,
the term "1st post-separation years" means the 1st calendar year
in which the payor spouse paid to the payee spouse alimony or
separate maintenance payments to which this section applies.  The
2nd and 3rd post-separation years shall be the 1st and 2nd
succeeding calendar years, respectively.

72.  Annuities; certain proceeds of endowment and life insurance
contracts
(a)  General rule for annuities. -- Except as otherwise provided
in this chapter, gross income includes any amount received as an
annuity (whether for a period certain or during one or more
lives) under an annuity, endowment, or life insurance contract.
(b)  Exclusion ratio. --
(1)  In general. -- Gross income does not include that part of
any amount received as an annuity under an annuity, endowment, or
life insurance contract which bears the same ratio to such amount
as the investment in the contract (as of the annuity starting
date) bears to the expected return under the contract (as of such
date).
(2)  Exclusion limited to investment. -- The portion of any
amount received as an annuity which is excluded from gross income
under paragraph (1) shall not exceed the unrecovered investment
in the contract immediately before the receipt of such amount.
93)  Deduction where annuity payments cease before entire
investment recovered. --
(A)  In general. -- If --
(i)  after the annuity starting date, payments as an annuity
under the contract cease by reason of the death of an annuitant,
and
(ii)  as of the date of such cessation, there is unrecovered
investment in the contract,
the amount of such unrecovered investment (in excess of any
amount specified in subsection (e)(5) which was not included in
gross income) shall be allowed as a deduction to the annuitant
for his last taxable year.
(B)  Payments to other persons. -- In the case of any contract
which provides for payments meeting the requirements of
subparagraphs (B) and (C) of subsection (c)(2), the deduction
under subparagraph (A) shall be allowed to the person entitled to
such payments for the taxable year is which such payments are
received.
(C)  Net operating loss deductions provided. -- For purposes of
section 172, a deduction allowed under this paragraph shall be
treated as if it were attributable to a trade or business of the
taxpayer.
(4)  Unrecovered investment. -- For purposes of this subsection,
the unrecovered investment in the contract as of any date is --
(A)  the investment in the contract as of the annuity staring
date reduced by
(B)  the aggregate amount received under the contract on or after
such annuity starting date and before the date as of which the
determination is being made, to the extent such amount was
excludable from gross income under this subtitle.
(c)  Definitions. --
(1)  Investment in the contract. -- For purposes of subsection
(b), the investment in the contract as of the annuity starting
date is --
(A)  the aggregate amount of premiums or other consideration paid
for the contract, minus
(B)  the aggregate amount received under the contract before such
date to the extent that such amount was excludable from gross
income under this subtitle or prior income tax laws.
(2)  Adjustment in investment where there is refund feature. --
(A)  the expected return under the contract depends in whole or
in part on the life expectancy of one or more individuals;
(B)  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 or annuitants; and
(C)  such payments are in the nature of a refund of the
consideration paid,
then the value (computed without discount for interest) of such
payments on the annuity starting date shall be subtracted form
the amount determined under paragraph (1).  Such value shall be
computed in accordance with actuarial tables prescribed by the
Secretary.  For purposes of this paragraph and of subsection
(e)(2)(A), the term "refund of the consideration paid" includes
amounts payable after the death of an annuitant by reason of a
provision in the contract for a life annuity with minimum period
of payments certain, but (if part of the consideration was
contributed by an employer) does not include that part of any
payment to a beneficiary (or to the estate of the annuitant)
which is not attributable to the consideration paid by the
employee for the contract as determined under paragraph (1)(A).
(3)  Expected return. -- For purposes of subsection (b), the
expected return under the contract shall be determined as
follows:
(A)  Life expectancy. -- If the expected return under the
contract, for the period on and after the annuity staring date,
depends in whole or in part on the life expectancy of one or more
individuals, the expected return shall be construed with
reference to actuarial tables prescribed by the Secretary.
(B)  Installment payments. -- If subparagraph (A) does not apply,
the expected return is the aggregate of the amounts receivable
under the contract as an annuity.
(4)  Annuity starting date. -- For purposes of this section, the
annuity starting date in the case of any contract is the first
day of the first period for which an amount is received as an
annuity under the contract; except that if such date was before
January 1, 1954, then the annuity starting date is January 1,
1954.
(d)  Treatment of employee contributions under defined
contribution plans as separate contracts. -- For purposes of this
section, employee contributions (and any income allocable
thereto) under a defined contribution plan may be treated as a
separate contract.
(e)  Amounts not received as annuities. --
(1)  Application of subsection. --
(A)  In general. -- This subsection shall apply to any amount
which --
(i)  is received under an annuity, endowment, or life insurance
contract, and
(ii)  is not received as an annuity,
if no provision of this subtitle (other than this subsection)
applies with respect to such amount.
(B)  Dividends. -- For purposes of this section, any amount
received which is in the nature of a dividend or similar
distribution shall be treated as an amount not received as an
annuity.
(2)  General rule. -- Any amount to which this subsection applies
--
(A)  if received on or after the annuity starting date, shall be
included in gross income, or
(B)  if received before the annuity starting date -
(i)  shall be included in gross income to the extent allocable to
income on the contract, and
(ii)  shall not be included in gross income to the extent
allocable to the investment in the contract.
(3)  Allocation of amounts to income and investment. -- For
purposes of paragraph (2)(B) --
(A)  Allocation to income. -- Any amount to which this subsection
applies shall be treated as allocable to income on the contract
to the extent that such amount does not exceed the excess (if
any) of --
(i)  the cash value of the contract (determined without regard to
any surrender charge) immediately before the amount is received,
over
(ii)  the investment in the contract at such time.
(B)  Allocation to investment. -- Any amount to which this
subsection applies shall be treated as allocable to investment in
the contract to the extent that such amount is not allocated to
income under subparagraph (A).
(4)  Special rules for application of paragraph (2)(B). -- For
purposes of paragraph (2)(B) --
(A)  Loans treated as distributions. -- If, during any taxable
year, an individual --
(i)  receives (directly or indirectly) any amount as a loan under
any contract to which this subsection applies, or
(ii)  assign or pledges (or agrees to assign or pledge) any
portion of the value of any such contract,
such amount or portion shall be treated as received under the
contract as an amount not received as an annuity.  The preceding
sentence shall not apply for purposes of determining investment
in the contract, except that the investment in the contract shall
be increased by any amount included in gross income by reason of
the amount treated as received under the preceding sentence.
(B)  treatment of policyholder dividends. -- Any amount described
in paragraph (1)(B) shall not be included in gross income under
paragraph (2)(B)(i) to the extent such amount is retained by the
insurer as a premium or other consideration paid or the contract.
(C)  Treatment of transfers without adequate consideration. --
(i)  In general. -- If an individual who holds an annuity
contract transfers it without full and adequate consideration,
such individual shall be treated as receiving an amount equal to
the excess of --
(I)  the cash surrender value of such contract at the time of
transfer, over
(II)  the investment in such contract at such time, under the
contract as an amount not received as an annuity.
(ii)  Exception for certain transfers between spouses or former
spouses. -- Clause (i) shall not apply to any transfer to which
section 1041(a) (relating to transfers of property between
spouses or incident to divorce) applies.
(iii)  Adjustment to investment in contract of transferee. -- If
under clause (i) an amount is included in the gross income of the
transferor of an annuity contract, the investment in the contract
of the transferee in such contract shall be increased by the
amount so included.
(5)  retention of existing rules in certain cases. --
(A)  In general. -- In any case to which this paragraph applies
--
(i)  paragraphs (2)(B) and (4)(A) shall not apply, and
(ii)  if paragraph (2)(A) does not apply,
the amount shall be included in gross income, but only to the
extent it exceeds the investment in the contract.
(B)  Existing contracts. -- This paragraph shall apply to
contracts entered into before August 14, 1982.  Any amount
allocable to investment in the contract after August 13, 1982,
shall be treated as from a contract entered into after such date.
(C)  Certain life insurance and endowment contracts. -- Except as
provided in paragraph (10) and except to the extent prescribed by
the Secretary by regulations, this paragraph shall apply to any
amount not received as an annuity which is received under a life
insurance or endowment contract.
(D)  Contracts under qualified plans. -- Except as provided
in paragraph (8), this paragraph shall apply to any amount
received --
(i)  form a trust described in section 401(a) which is exempt
from tax under section 501(A).
(ii)  from a contract --
(I)  purchased by a trust described in clause (i),
(II)  purchased as part of a plan described in section 403(a),
(III)  described in section 403(b), or
(IV)  provided for employees of a life insurance company under a
plan described in section 818(a)(3), or
(iii)  from an individual retirement account or an individual
retirement annuity.
Any dividend described in section 404(k) which is received by a
participant or beneficiary shall, for purposes of this
subparagraph, be treated as paid under a separate contract to
which clause (ii)(I) applies.
(E)  Full refunds, surrenders, redemptions, and maturities. --
This paragraph shall apply to --
(i)  any amount received, whether in a single sum or otherwise,
under a contract in full discharge of the obligation under the
contract which is in the nature of a refund of the consideration
paid for the contract, and
(ii)  any amount received under a contract on its complete
surrender, redemption, or maturity.
In the case of any amount to which the preceding sentence
applies, the rule of paragraph (2)(A) shall not apply.
(6)  Investment in the contract. -- For purposes of this
subsection, the investment in the contract as of any date is --
(A)  the aggregate amount of premiums or other consideration paid
for the contract before such date, minus
(B)  the aggregate amount received under the contract before
such date, to the extent that such amount was excludable form
gross income under this subtitle or prior income tax laws.
(8)  Extension of paragraph (2)(b) to qualified plans. --
(A)  In general. -- Notwithstanding any other provision of this
subsection, in the case of any amount received before the annuity
starting date form a trust or contract described in paragraph
(5)(D), paragraph (2)(B) shall apply to such amounts.
(B)  Allocation of amount received. -- For purposes of paragraph
(2)(B), the amount allocated to the investment in the contract
shall be the portion of the amount described in subparagraph (A)
which bears the same ratio to such amount as the investment in
the contract bears to the account balance.  The determination
under the preceding sentence shall be made as of the time of the
distribution or at such other time as the Secretary may
prescribe.
(C)  Treatment of forfeitable rights. -- If an employee does not
have a nonforfeitable right to any amount under any trust or
contract to which subparagraph (A) applies, such amount shall not
be treated as part of the account balance.
(D)  Investment in the contract before 1987. -- In the case of a
plan which on May 5, 1986, permitted withdrawal of any employee
contributions before separation from service, subparagraph (A)
shall apply only to the extent that amounts received before the
annuity starting date (when increased by amounts previously
received under the contract after December 31, 1986) exceed the
investment in the contract as of December 31, 1986.
(10)  Treatment of modified endowment contracts. --
(A)  In general. -- Notwithstanding paragraph (5)(C), in the case
of any modified endowment contract (as defined in section 7702A)
--
(i)  paragraphs (2)(B) and (4)(A) shall apply, and
(ii)  in applying paragraph (4)(A), "any person" shall be
substituted for "an individual".
(B)  treatment of certain burial contracts. -- Notwithstanding
subparagraph (A), paragraph (4)(A) shall not apply to any
assignment (or pledge) of a modified endowment contract if such
assignment (or pledge) is solely to cover the payment of expenses
referred to in section 7702(e)(2)(C)(iii) an if the maximum death
benefit under such contract does not exceed $25,000.
(II)  Anti-abuse rules. --
(A)  In general. -- For purposes of determining the amount
includable in gross income under this subsection --
(i)  all modified endowment contracts issued by the same company
to the same policyholder during any calendar year shall be
treated as 1 modified endowment contract, and
(ii)  all annuity contracts issued by the same company to the
same policyholder during any calendar year shall be treated as 1
annuity contract.
The preceding sentence shall not apply to any contract described
in paragraph (5)(D).
(B)  Regulatory authority. -- The Secretary may by regulations
prescribe such additional rules as any be necessary or
appropriate to prevent avoidance of the purposes of this
subsection through serial purchases of contracts or otherwise.
(f)  Special rules for computing employees' contributions. -- In
computing, for proposes of subsection (c)(1)(A), the aggregate
amount premiums or other consideration paid for the contract, and
for purposes of subsection (e)(6), the aggregate premiums or
other consideration paid, amounts contributed by the employer
shall be included, but only to the extent that --
(1)  such amounts were includable in the gross income of the
employee under this subtitle or prior income tax laws; or
(2)  if such amounts had been paid directly to the employee at
the time they were contributed, they would not have been
includable in the gross income of the employee under the law
applicable at the time of such contribution.
Paragraph (2) shall not apply to amounts which were contributed
by the employer after December 31, 1962, and which would not have
been includable in the gross income of the employee by reason of
the application of section 911 if such amounts had been paid
directly to the employee at the time of contribution.  The
preceding sentence shall not apply to amounts which were
contributed by the employer, as determined under regulations
prescribed by the Secretary, to provide pension or annuity
credits, to the extent such credits are attributable to services
performed before January 1, 1963, and are provided pursuant to
pension or annuity plan provisions in existence on March 12,
1962, and on that date applicable to such services.
(g)  Rules for transferee where transfer was for value. -- Where
any contract for any interest therein) is transferred (by
assignment or otherwise) for a valuable consideration, to the
extent that the contract (or interest therein) does not, in the
hands of the transferee, have a basis which is determined by
reference to the basis in the hands of the transferor, then --
(1)  for purposes of this section, only the actual value of such
consideration, plus the amount of the premiums and other
consideration paid by the transferee after the transfer, shall be
taken into account in computing the aggregate amount of the
premiums or other consideration paid for the contract;
(2)  for purposes of subsection (c)(1)(B), there shall be taken
into account only the aggregate amount received under the
contract by the transferee before the annuity starting date, to
the extent that such amount was excludable form gross income
under this subtitle or prior income tax laws; and
(3)  the annuity starting date is January 1, 1954, or the first
day of the first period for which the transferee received an
amount under the contract as an annuity, whichever is the later.
For purposes of this subsection, the term "transferee" includes a
beneficiary of, or the estate of, the transferee.
(h)  Option to receive annuity in lieu of lump sum. -- If --
(1)  a contract provides for payment of a lump sum in full
discharge of an obligation under the contract, subject to an
option to receive an annuity in lieu of such lump sum;
(2)  the option is exercised within 60 days after the day on
which such lump sum first became payable; and
(3)  part or all of such lump sum would (but for this subsection)
be includable in gross income by reason of subsection
(e)(1),then, for purposes of this subtitle, no part of such lump
sum shall be considered as includable in gross income at the time
such lump first became payable.
(j)  Interest. -- Notwithstanding any other provision of this
section, if any amount is held under an agreement to pay interest
thereon, the interest payments shall be included in gross income.
(l)  Face-amount certificates. -- For purposes of this section,
the term "endowment contract" includes a face-amount certificate,
as defined in section 2(a)(15) of the Investment Company Act of
1940 (15 U>S>C>, sec. 80a-2), issued after December 31, 1954.
(m)  Special rules applicable to employee annuities and
distributions under employee plans. --
(2)  Computation of consideration paid by the employee. -- In
computing --
(A)  the aggregate amount of premiums or other consideration paid
for the contract for purposes of subsection (c)(1)(A) (relating
to the investment in the contract),
(B)  the consideration for the contract contributed by the
employee for purposes of subsection (d)(1) (relating to
employee's contributions revocable in 3 years) and subsection
(e)(7) (relating to plans where substantially all contributions
are employee contributions), and
(C)  the aggregate premiums or other consideration paid for
purposes of subsection (e)(6) (relating to certain amounts not
received as an annuity),
any amount allowed as a deduction with respect to the contract
under section 404 which was paid while the employee was an
employee within the meaning of section 401(c)(1) shall be treated
as consideration contributed by the employer, and there shall not
be taken into account any portion of the premiums or other
consideration for the contract paid while the employee was an
owner-employee which is properly allocable (as determined under
regulations prescribed by the Secretary) to the cost of life,
accident, health, or other insurance.
(3)  Life insurance contracts. --
(A)  This paragraph shall apply to any life insurance contract --
(i)  purchased as a part of a plan described in section 403(a)
which is exempt form  tax under section 501(a) if the proceeds of
such contract are payable directly or indirectly to a participant
in such trust or to a beneficiary of such participant.
(B)  Any contribution to a plan described in subparagraph (A)(i)
or a trust described in subparagraph (A)(ii) which is allowed as
a deduction under section 404, and any income of a trust
described in subparagraph (A)(ii), which is determined in
accordance with regulations prescribed by the Secretary to have
been applied to purchase the life insurance protection under a
contract described in subparagraph (A), is includable in the
gross income of the participant for the taxable year when so
applied.
(C)  In the case of the death of an individual insured under a
contract described in subparagraph (A), an amount equal to the
cash surrender value of the contract immediately before the death
of the insured shall be treated as a payment under such plan or a
distribution by such trust, and the excess of the amount payable
by reason of the death of the insured over such cash surrender
value shall not be includable in gross income under this section
and shall be treated as provided in section 101.
(5)  Penalties applicable to certain amounts received by 5-
percent owners. --
(A)  this paragraph applies to amounts which are received from a
qualified trust described in section 401(a) or under a plan
described in section 403(a) at any time by an individual who is,
or has bee, a 5-percent owner, or by a successor of such an
individual, but only to the extent such amounts are determined,
under regulations prescribed by the Secretary, to exceed the
benefits provided for such individual under the plan formula.
(B)  If a person receives an amount to which this paragraph
applies, his tax under this chapter of the taxable year in which
such amount is received shall be increased by an amount equal to
10 percent of the portion of the amount so received which is
includable in his gross income for such taxable year.
(C)  For purposes of this paragraph, the term "5-percent owner"
means any individual who, at any time during the 5 plan years
preceding the plan year ending in the taxable year in which the
amount is received, is a 5-percent owner (as defined in section
416(i)(1)(B)).
(6)  Owner-employee defined. -- For purposes of this subsection,
the term "owner-employee" has the meaning assigned to it by
section 401(c)(3) and includes an individual for whose benefit an
individual retirement account or annuity described in section
408(a) or (b) is maintained.  For purposes of the preceding
sentence, the term "owner-employee" shall include an employee
within the meaning of section 401(c)(1).
(7)  Meaning of disabled. -- For purposes of this section, an
individual shall be considered to be disabled if he is unable to
engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be
expected to result in death or to be of long-continued and
indefinite duration.  An individual shall not be considered to be
disabled unless he furnishes proof of the existence thereof in
such form and manner as the Secretary may require.
(10)  Determination of investment in the contract in the case of
qualified domestic relations orders. -- Under regulations
prescribed by the Secretary, in the case of a distribution or
payment made to an alternate payee who is the spouse or former
spouse of the participant pursuant to a qualified domestic
relations order (as defined in section 414(p)), the investment in
the contract as of the date prescribed in such regulations shall
be allocated on a pro rata basis between the present value of
such distribution or payment and the present value of all other
benefits payable with respect to the participant to which such
order relates.
(n)  Annuities under retired serviceman's family protection plan
or survivor benefit plan. -- Subsection (b) shall not apply in
the case of amounts received after December 31, 1965, as an
annuity under chapter 73 of title 10 of the United States code,
but all such amounts shall be excluded from gross income until
there has been so excluded (under section 122(b)(1) or this
section, including amounts excluded before January 1, 1966) an
amount equal to the consideration for the contract (as defined by
section 122(b)(2)), plus any amount treated pursuant to section
101(b)(2)(D) as additional consideration paid by the employee.
Thereafter all amounts so received shall be included in gross
income.
(o)  Special rules for distribution from qualified plans to which
employee made deductible contributions. --
(1)  Treatment of contributions. -- For purposes of this section
and section 402 and 403, notwithstanding section 414(h), any
deductible employee contribution made to a qualified employer
plan or government plan shall be treated as an amount contributed
by the employer which is not includable in the gross income of
the employee.
(3)  Amounts constructively received. --
(A)  In general. -- For purposes of this subsection, rules
similar to the rules provided by subsection (p) (other than the
exception contained in paragraph (2) thereof) shall apply.
(B)  Purchase of life insurance. -- To the extent any amount of
accumulated deductible employee contributions of an employee are
applied to the purchase of life insurance contracts, such amount
shall be treated as distributed to the employee in the year so
applied.
(4)  Special rule for treatment of rollover amounts. -- For
purposes of sections 402(a)(5), 402(a)(7), 403(d)(3), the
Secretary shall prescribe regulations providing for such
allocations of amounts attributable to accumulated deductible
employee contributions, and for such other rules, as may be
necessary to insure that such accumulated deductible employee
contributions do not become eligible for additional tax benefits
(or freed from limitations) through the use of rollovers.
(5)  Definitions and special rules. -- For purposes of this
subsection --
(A)  Deductible employee contributions. -- The term "deductible
employee contributions" means any qualified voluntary employee
contribution (as defined in section 219(e)(2)) made after
December 31, 1981, in a taxable year beginning after such date an
made for a taxable year beginning before January 1, 1987, and
allowable as a deduction under section 219(a) for such taxable
year.
(B)  Accumulated deductible employee contributions. -- The term
"accumulated deductible employee contributions" means the
deductible employee contributions --
(i)  increased by the amount of income and gain allocable to such
contributions, and
(ii)  reduced by the sum of the amount of loss and expense
allocable to such contributions and the amounts distributed with
respect to the employee which are attributable to such
contributions).