‘‘(8) TREATMENT OF MODIFIED ENDOWMENT 
CONTRACTS.— 
‘‘(A) IN GENERAL.—Notwithstanding para-
graph (5)(C), in the case of any modified en-
dowment 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 in-
dividual’. 
‘‘(B) TREATMENT
OF
CERTAIN
BURIAL 
CONTRACTS.—Notwithstanding 
subparagraph 
(A), paragraph (4)(A) shall not apply to any as-
signment (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) and if the maximum 
death benefit under such contract does not ex-
ceed $25,000. 
‘‘(9) ANTI-ABUSE RULES.— 
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount includible in gross income 
under this subsection— 
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‘‘(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 con-
tract, 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 Sec-
retary may by regulations prescribe such addi-
tional rules as may 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 purposes of sub-
section (c)(1)(A), the aggregate amount of premiums or 
other consideration paid for the contract, and for purposes 
of subsection (e)(6), the aggregate premiums or other con-
sideration paid, amounts contributed by the employer shall 
be included, but only to the extent that— 
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‘‘(1) such amounts were includible 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 includible in the gross income 
of the employee under the law applicable at the time 
of such contribution. 
‘‘(g) RULES FOR TRANSFEREE WHERE TRANSFER 
WAS FOR VALUE.—Where any contract (or 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 trans-
feree, 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 ac-
tual value of such consideration, plus the amount of 
the premiums and other consideration paid by the 
transferee after the transfer, shall be taken into ac-
count in computing the aggregate amount of the 
premiums or other consideration paid for the con-
tract; 
‘‘(2) for purposes of subsection (c)(1)(B), there 
shall be taken into account only the aggregate 
amount received under the contract by the trans-
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feree before the annuity starting date, to the extent 
that such amount was excludable from 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 con-
tract as an annuity, whichever is the later. 
‘‘(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 con-
tract, 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 pay-
able; and 
‘‘(3) part or all of such lump sum would (but 
for this subsection) be includible in gross income by 
reason of subsection (e)(1), then, for purposes of 
this subtitle, no part of such lump sum shall be con-
sidered as includible in gross income at the time 
such lump sum first became payable. 
‘‘(i) INTEREST.—Notwithstanding any other provi-
sion of this section, if any amount is held under an agree-
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ment to pay interest thereon, the interest payments shall 
be included in gross income. 
‘‘(j) 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. 
‘‘(k) SPECIAL RULES APPLICABLE TO EMPLOYEE 
ANNUITIES
AND
DISTRIBUTIONS
UNDER
EMPLOYEE 
PLANS.— 
‘‘(1) 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), and 
‘‘(B) the aggregate premiums or other con-
sideration 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 em-
ployee within the meaning of section 401(c)(1) 
shall be treated as consideration contributed by 
the employer, and there shall not be taken into 
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account any portion of the premiums or other 
consideration for the contract paid while the 
employee was an owner-employee which is prop-
erly allocable (as determined under regulations 
prescribed by the Secretary) to the cost of life, 
accident, health, or other insurance. 
‘‘(2) LIFE INSURANCE CONTRACTS.— 
‘‘(A) This paragraph shall apply to any life 
insurance contract— 
‘‘(i) purchased as a part of a plan de-
scribed in section 403(a), or 
‘‘(ii) purchased by a trust described in 
section 401(a) which is exempt from tax if 
the proceeds of such contract are payable 
directly or indirectly to a participant in 
such trust or to a beneficiary of such par-
ticipant. 
‘‘(B) Any contribution to a plan described 
in subparagraph (A)(i) or a trust described in 
subparagraph (A)(ii) which is allowed as a de-
duction 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 ap-
plied to purchase the life insurance protection 
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under a contract described in subparagraph 
(A), is includible in the gross income of the par-
ticipant for the taxable year when so applied. 
‘‘(C) In the case of the death of an indi-
vidual insured under a contract described in 
subparagraph (A), an amount equal to the cash 
surrender value of the contract immediately be-
fore 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 pay-
able by reason of the death of the insured over 
such cash surrender value shall not be includ-
ible in gross income under this section and shall 
be treated as provided in section 101. 
‘‘(3) PENALTIES
APPLICABLE
TO
CERTAIN 
AMOUNTS RECEIVED BY 5-PERCENT OWNERS.— 
‘‘(A) This paragraph applies to amounts 
which are received from a qualified trust de-
scribed in section 401(a) or under a plan de-
scribed in section 403(a) at any time by an in-
dividual who is, or has been, 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, 
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to exceed the benefits provided for such indi-
vidual under the plan formula. 
‘‘(B) If a person receives an amount to 
which this paragraph applies, his tax under this 
chapter for 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 includible 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 pre-
ceding 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). 
‘‘(4) OWNER-EMPLOYEE
DEFINED.—For pur-
poses 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 indi-
vidual 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 sec-
tion 401(c)(1). 
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‘‘(5) 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 deter-
minable 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. 
‘‘(6) 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 allo-
cated 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. 
‘‘(l) ANNUITIES UNDER RETIRED SERVICEMAN’S 
FAMILY
PROTECTION
PLAN
OR
SURVIVOR
BENEFIT 
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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) 
of the Internal Revenue Code of 1986, section 93, or this 
section, including amounts excluded before January 1, 
1966) an amount equal to the consideration for the con-
tract (as defined by section 122(b)(2) of the Internal Rev-
enue Code of 1986). Thereafter all amounts so received 
shall be included in gross income. 
‘‘(m) SPECIAL RULES FOR DISTRIBUTIONS FROM 
QUALIFIED PLANS
TO WHICH EMPLOYEE MADE DE-
DUCTIBLE CONTRIBUTIONS.— 
‘‘(1) TREATMENT
OF
CONTRIBUTIONS.—For 
purposes of this section and sections 402 and 403, 
notwithstanding section 414(h), any deductible em-
ployee contribution made to a qualified employer 
plan or government plan shall be treated as an 
amount contributed by the employer which is not in-
cludible in the gross income of the employee. 
‘‘(2) AMOUNTS CONSTRUCTIVELY RECEIVED.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, rules similar to the rules provided 
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by subsection (n) (other than the exception con-
tained in paragraph (2) thereof) shall apply. 
‘‘(B) PURCHASE OF LIFE INSURANCE.—To 
the extent any amount of accumulated deduct-
ible employee contributions of an employee are 
applied to the purchase of life insurance con-
tracts, such amount shall be treated as distrib-
uted to the employee in the year so applied. 
‘‘(3) SPECIAL RULE FOR TREATMENT OF ROLL-
OVER AMOUNTS.—For purposes of sections 402(c), 
403(a)(4), and 408(d)(3), the Secretary shall pre-
scribe regulations providing for such allocations of 
amounts attributable to accumulated deductible em-
ployee contributions, and for such other rules, as 
may be necessary to insure that such accumulated 
deductible employee contributions do not become eli-
gible for additional tax benefits (or freed from limi-
tations) through the use of rollovers. 
‘‘(4) ORDERING RULES.—Unless the plan speci-
fies otherwise, any distribution from such plan shall 
not be treated as being made from the accumulated 
deductible employee contributions, until all other 
amounts to the credit of the employee have been dis-
tributed. 
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110 
‘‘(n) LOANS TREATED AS DISTRIBUTIONS.—For pur-
poses of this section— 
‘‘(1) TREATMENT AS DISTRIBUTIONS.— 
‘‘(A) LOANS.—If during any taxable year a 
participant or beneficiary receives (directly or 
indirectly) any amount as a loan from a quali-
fied employer plan, such amount shall be treat-
ed as having been received by such individual as 
a distribution under such plan. 
‘‘(B) ASSIGNMENTS OR PLEDGES.—If dur-
ing any taxable year a participant or beneficiary 
assigns (or agrees to assign) or pledges (or 
agrees to pledge) any portion of his interest in 
a qualified employer plan, such portion shall be 
treated as having been received by such indi-
vidual as a loan from such plan. 
‘‘(2) EXCEPTION FOR CERTAIN LOANS.— 
‘‘(A) GENERAL
RULE.—Paragraph (1) 
shall not apply to any loan to the extent that 
such loan (when added to the outstanding bal-
ance of all other loans from such plan whether 
made on, before, or after August 13, 1982), 
does not exceed the lesser of— 
‘‘(i) $50,000, reduced by the excess (if 
any) of— 
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‘‘(I) the highest outstanding bal-
ance of loans from the plan during the 
1-year period ending on the day be-
fore the date on which such loan was 
made, over 
‘‘(II) the outstanding balance of 
loans from the plan on the date on 
which such loan was made, or 
‘‘(ii) the greater of (I) one-half of the 
present value of the nonforfeitable accrued 
benefit of the employee under the plan, or 
(II) $10,000. 
for purposes of clause (ii), the present value of 
the nonforfeitable accrued benefit shall be de-
termined without regard to any accumulated 
deductible employee contributions (as defined in 
subsection (m)(5)(B)). 
‘‘(B) REQUIREMENT THAT LOAN BE RE-
PAYABLE WITHIN 5 YEARS.— 
‘‘(i) IN GENERAL.—Subparagraph (A) 
shall not apply to any loan unless such 
loan, by its terms, is required to be repaid 
within 5 years. 
‘‘(ii) EXCEPTION FOR HOME LOANS.— 
Clause (i) shall not apply to any loan used 
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to acquire any dwelling unit which within 
a reasonable time is to be used (deter-
mined at the time the loan is made) as the 
principal residence of the participant. 
‘‘(C) REQUIREMENT OF LEVEL AMORTIZA-
TION.—Except as provided in regulations, this 
paragraph shall not apply to any loan unless 
substantially level amortization of such loan 
(with payments not less frequently than quar-
terly) is required over the term of the loan. 
‘‘(D) RELATED EMPLOYERS AND RELATED 
PLANS.—For purposes of this paragraph— 
‘‘(i) the rules of subsections (b), (c), 
and (m) of section 414 shall apply, and 
‘‘(ii) all plans of an employer (deter-
mined after the application of such sub-
sections) shall be treated as 1 plan. 
‘‘(o) 10–PERCENT PENALTY FOR PREMATURE DIS-
TRIBUTIONS FROM ANNUITY CONTRACTS.— 
‘‘(1) IMPOSITION
OF
PENALTY.—If any tax-
payer receives any amount under an annuity con-
tract, the taxpayer’s tax under this chapter for the 
taxable year in which such amount is received shall 
be increased by an amount equal to 10 percent of 
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113 
the portion of such amount which is includible in 
gross income. 
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN 
DISTRIBUTIONS.—Paragraph (1) shall not apply to 
any distribution— 
‘‘(A) made on or after the date on which 
the taxpayer attains age 591⁄2, 
‘‘(B) made on or after the death of the 
holder (or, where the holder is not an indi-
vidual, the death of the primary annuitant), 
‘‘(C) attributable to the taxpayer’s becom-
ing disabled within the meaning of subsection 
(k)(5), 
‘‘(D) which is a part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life 
expectancy) of the taxpayer or the joint lives 
(or joint life expectancies) of such taxpayer and 
his designated beneficiary, 
‘‘(E) from a plan, contract, account, trust, 
or annuity described in section 72(e)(5)(D) of 
the Internal Revenue Code of 1986, 
‘‘(F) allocable to investment in the con-
tract before August 14, 1982, 
‘‘(G) under a qualified funding asset, 
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‘‘(H) to which subsection (r) applies (with-
out regard to paragraph (2) thereof), 
‘‘(I) under an immediate annuity contract, 
or 
‘‘(J) which is purchased by an employer 
upon the termination of a plan described in sec-
tion 401(a) or 403(a) and which is held by the 
employer until such time as the employee sepa-
rates from service. 
‘‘(3) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.—If— 
‘‘(A) paragraph (1) does not apply to a 
distribution by reason of paragraph (2)(D), and 
‘‘(B) the series of payments under such 
paragraph are subsequently modified (other 
than by reason of death or disability)— 
‘‘(i) before the close of the 5-year pe-
riod beginning on the date of the first pay-
ment and after the taxpayer attains age 
591⁄2, or 
‘‘(ii) before the taxpayer attains age 
591⁄2, the taxpayer’s tax for the 1st taxable 
year in which such modification occurs 
shall be increased by an amount, deter-
mined under regulations, equal to the tax 
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which (but for paragraph (2)(D)) would 
have been imposed, plus interest for the 
deferral period (within the meaning of sub-
section (r)(4)(B)). 
‘‘(p) CERTAIN RAILROAD RETIREMENT BENEFITS 
TREATED AS RECEIVED UNDER EMPLOYER PLANS.— 
‘‘(1) IN GENERAL.—Notwithstanding any other 
provision of law, any benefit provided under the 
Railroad Retirement Act of 1974 (other than a tier 
1 railroad retirement benefit) shall be treated for 
purposes of this title as a benefit provided under an 
employer plan which meets the requirements of sec-
tion 401(a). 
‘‘(2) TIER
TAXES
TREATED
AS
CONTRIBU-
TIONS.—For purposes of paragraph (1)— 
‘‘(A) IN GENERAL.— 
‘‘(i) the tier 2 portion of the tax im-
posed by section 3201 (relating to tax on 
employees) shall be treated as an employee 
contribution, 
‘‘(ii) the tier 2 portion of the tax im-
posed by section 3211 (relating to tax on 
employee representatives) shall be treated 
as an employee contribution, and 
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116 
‘‘(iii) the tier 2 portion of the tax im-
posed by section 3221 (relating to tax on 
employers) shall be treated as an employer 
contribution. 
‘‘(B) TIER 2 PORTION.—For purposes of 
subparagraph (A)— 
‘‘(i) AFTER
1984.—With respect to 
compensation paid after 1984, the tier 2 
portion shall be the taxes imposed by sec-
tions 3201(b), 3211(a)(2), and 3221(b). 
‘‘(ii) BEFORE 1985.—With respect to 
compensation paid before 1985, see section 
72(r) of Internal Revenue Code of 1986 
for the definition of tier 2 portion. 
‘‘(C) CONTRIBUTIONS NOT ALLOCABLE TO 
SUPPLEMENTAL ANNUITY OR WINDFALL BENE-
FITS.—For purposes of paragraph (1), no 
amount treated as an employee contribution 
under this paragraph shall be allocated to— 
‘‘(i) any supplemental annuity paid 
under section 2(b) of the Railroad Retire-
ment Act of 1974, or 
‘‘(ii) any benefit paid under section 
3(h), 4(e), or 4(h) of such Act. 
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117 
‘‘(3) TIER
RAILROAD
RETIREMENT
BEN-
EFIT.—For purposes of paragraph (1), the term 
‘tier 1 railroad retirement benefit’ has the meaning 
given such term by section 3(b)(2)(B). 
‘‘(q) REQUIRED DISTRIBUTIONS WHERE HOLDER 
DIES BEFORE ENTIRE INTEREST IS DISTRIBUTED.— 
‘‘(1) IN
GENERAL.—A contract shall not be 
treated as an annuity contract for purposes of this 
chapter unless it provides that— 
‘‘(A) if any holder of such contract dies on 
or after the annuity starting date and before 
the entire interest in such contract has been 
distributed, the remaining portion of such inter-
est will be distributed at least as rapidly as 
under the method of distributions being used as 
of the date of his death, and 
‘‘(B) if any holder of such contract dies be-
fore the annuity starting date, the entire inter-
est in such contract will be distributed within 5 
years after the death of such holder. 
‘‘(2) EXCEPTION FOR CERTAIN AMOUNTS PAY-
ABLE OVER LIFE OF BENEFICIARY.—If— 
‘‘(A) any portion of the holder’s interest is 
payable to (or for the benefit of) a designated 
beneficiary, 
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‘‘(B) such portion will be distributed (in 
accordance with regulations) over the life of 
such designated beneficiary (or over a period 
not extending beyond the life expectancy of 
such beneficiary), and 
‘‘(C) such distributions begin not later 
than 1 year after the date of the holder’s death 
or such later date as the Secretary may by reg-
ulations prescribe, then for purposes of para-
graph (1), the portion referred to in subpara-
graph (A) shall be treated as distributed on the 
day on which such distributions begin. 
‘‘(3) SPECIAL RULE WHERE SURVIVING SPOUSE 
BENEFICIARY.—If the designated beneficiary re-
ferred to in paragraph (2)(A) is the surviving spouse 
of the holder of the contract, paragraphs (1) and (2) 
shall be applied by treating such spouse as the hold-
er of such contract. 
‘‘(4) DESIGNATED
BENEFICIARY.—For pur-
poses of this subsection, the term ‘designated bene-
ficiary’ means any individual designated a bene-
ficiary by the holder of the contract. 
‘‘(5) EXCEPTION FOR CERTAIN ANNUITY CON-
TRACTS.—This subsection shall not apply to any an-
nuity contract— 
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‘‘(A) which is provided— 
‘‘(i) under a plan described in section 
401(a) which includes a trust exempt from 
tax under section 501, or 
‘‘(ii) under a plan described in section 
403(a), 
‘‘(B) which is described in section 403(b), 
‘‘(C) which is an individual retirement an-
nuity or provided under an individual retire-
ment account or annuity, or 
‘‘(D) which is a qualified funding asset. 
‘‘(6) SPECIAL RULE WHERE HOLDER IS COR-
PORATION OR OTHER NON-INDIVIDUAL.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, if the holder of the contract is not 
an individual, the primary annuitant shall be 
treated as the holder of the contract. 
‘‘(B) PRIMARY ANNUITANT.—For purposes 
of subparagraph (A), the term ‘primary annu-
itant’ means the individual, the events in the 
life of whom are of primary importance in af-
fecting the timing or amount of the payout 
under the contract. 
‘‘(7) TREATMENT OF CHANGES IN PRIMARY AN-
NUITANT WHERE HOLDER OF CONTRACT IS NOT AN 
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INDIVIDUAL.—For purposes of this subsection, in 
the case of a holder of an annuity contract which is 
not an individual, if there is a change in a primary 
annuitant (as defined in paragraph (6)(B)), such 
change shall be treated as the death of the holder. 
‘‘(s) 10–PERCENT ADDITIONAL TAX ON EARLY DIS-
TRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.— 
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any 
taxpayer receives any amount from a qualified re-
tirement plan (as defined in section 4974(c)), the 
taxpayer’s tax under this chapter for the taxable 
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the 
portion of such amount which is includible in gross 
income. 
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN 
DISTRIBUTIONS.—Except as provided in paragraphs 
(3) and (4), paragraph (1) shall not apply to any of 
the following distributions: 
‘‘(A) IN
GENERAL.—Distributions which 
are— 
‘‘(i) made on or after the date on 
which the employee attains age 591⁄2, 
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‘‘(ii) made to a beneficiary (or to the 
estate of the employee) on or after the 
death of the employee, 
‘‘(iii) attributable to the employee’s 
being disabled within the meaning of sub-
section 72(m)(7) of the Internal Revenue 
Code of 1986, 
‘‘(iv) part of a series of substantially 
equal periodic payments (not less fre-
quently than annually) made for the life 
(or life expectancy) of the employee or the 
joint lives (or joint life expectancies) of 
such employee and his designated bene-
ficiary, 
‘‘(v) made to an employee after sepa-
ration from service after attainment of age 
55, 
‘‘(vi) dividends paid with respect to 
stock of a corporation which are described 
in section 404(k), or 
‘‘(vii) made from a Roth IRA (other 
than a distribution described in section 
30(d)(2)). 
‘‘(B) MEDICAL
EXPENSES.—Distributions 
made to the employee (other than distributions 
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‘‘(A) subsection (a) would not (but for this 
subsection) apply to such sale or exchange by 
reason of— 
‘‘(i) a failure to meet the ownership 
and use requirements of subsection (a), or 
‘‘(ii) subsection (b)(3), and 
‘‘(B) such sale or exchange is by reason of 
a change in place of employment, health, or, to 
the extent provided in regulations, unforeseen 
circumstances. 
‘‘(d) SPECIAL RULES.— 
‘‘(1) JOINT RETURNS.—If a husband and wife 
make a joint return for the taxable year of the sale 
or exchange of the property, subsections (a) and (c) 
shall apply if either spouse meets the ownership and 
use requirements of subsection (a) with respect to 
such property. 
‘‘(2) PROPERTY OF DECEASED SPOUSE.—For 
purposes of this section, in the case of an unmarried 
individual whose spouse is deceased on the date of 
the sale or exchange of property, the period such un-
married individual owned and used such property 
shall include the period such deceased spouse owned 
and used such property before death. 
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