A TAXPAYER CAME INTO MY OFFICE THIS WEEK WITH A 1099R FROM AN ANNUITY COMPANY SHOWING A $48,000 “TOTAL DISTRIBUTION”, DISTRIBUTION CODE “7”. THE TAXPAYER IS 70.

HE ADVISED ME THAT HIS LOCAL BANK FINANCIAL PLANNER ADVISED HIM TO TRANSFER THE ANNUITY TO A NEW ANNUITY AT A DIFFERENT COMPANY.

I ADVISED HIM THAT IF A 1035 EXCHANGE WAS DONE PROPERLY, THE DISTRIBUTION CODE WOULD SHOW A “6”.

APPARENTLY HIS PLANNER FAILED TO TELL HIM ABOUT 1035 EXCHANGES AND HAD HIM LIQUIDATE THE ANNUITY, PLACE THE PROCEEDS INTO HIS CHECKING ACCOUNT, THEN WRITE A CHECK TO THE NEW ANNUITY COMPANY FOR THE SAME AMOUNT.

WOULD THIS BE CONSIDERED A PROPER 1035? OR SINCE HE PHYSICALLY TOOK THE MONEY, IT IS A FULLY TAXABLE TRANSACTION?

IF IT IS TAXABLE, IT INCREASES HIS TAX LIABILITY BY $10,060.00.

CAN SOMEONE GIVE ME SOME GUIDANCE?

RESPECTFULLY YOURS,

BERNARD A. FAGNANI CPA/PFS