SWAP Income from a K-1

DTNY07 -- Wondering what you ended up figuring out on this. Dealing with a similar situation right now. Having a difficult time finding how to handle it. I'm thinking of treating it as a 1256 Loss on Form 6781 - Thank you for your reply, if you get this message, realize it's been a while since you posted this -- and it is April 10th!

What did you come up with? I am now preparing a clients return with a large swap loss and can't seem to find much detail on how to accurately report this.
 

Any info is greatly appreciated.

Thanks,

Gracie

The value of the new policy is the replacement cost for a similar policy with the same company, rather than the cash surrender value of the policy.  The excess is taxed as ordinary income rather than capital gain.

If proper procedures are not followed, an otherwise tax-free swap may not qualify as a tax-free transaction. For example, a taxpayer, intending to conduct a tax-free swap, received a check from an annuity from one insurance company and signed the check over to a second insurance for the purpose of purchasing an annuity from the second insurance company. The taxpayer, however, was forced to treat the amount received from the first insurance company as gross income under the rule51 that amounts received under an annuity contract that are not an annuity are taxable as ordinary income.52 If proper procedures had been followed, the taxpayer would have assigned the first contract to the second insurance company and there would have been a direct transfer of the cash value from the first insurance company to the second insurance company