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

• Author: Amoroso, Vincent
• Position: Brief Article

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

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

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

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