‘‘(B) ANNUITY CONTRACT.—For purposes 
of subparagraph (A) and subsections (b)(5) and 
(w), the term ‘annuity contract’ means a com-
mercial 
annuity 
(as 
defined 
by 
section 
3405(e)(6)), other than an endowment or life 
insurance contract. 
‘‘(C) MINIMUM PERIOD OF PAYMENTS.—
For purposes of subparagraph (A), the term 
‘minimum period of payments’ means a guaran-
teed term of payments that does not exceed the 
greater of 10 years or—
‘‘(i) the life expectancy of the annu-
itant as of the annuity starting date, in the 
case of lifetime annuity payments de-
scribed in subparagraph (A)(ii)(III), or 
‘‘(ii) the life expectancy of the annu-
itant and joint annuitant as of the annuity 
starting date, in the case of lifetime annu-
ity payments described in subparagraph 
(A)(ii)(IV). 
For purposes of this subparagraph, life expect-
ancy shall be computed with reference to the ta-
bles prescribed by the Secretary under para-
graph 
(3). 
For 
purposes 
of 
subsection 
(w)(1)(C)(ii), the permissible minimum period
of payments shall be determined as of the annu-
ity starting date and reduced by one for each 
subsequent year. 
‘‘(D) MINIMUM AMOUNT THAT MUST BE 
PAID IN ANY EVENT.—For purposes of subpara-
graph (A), the term ‘minimum amount that 
must be paid in any event’ means an amount 
payable to the designated beneficiary under an 
annuity contract that is in the nature of a re-
fund and does not exceed the greater of the 
amount applied to produce the lifetime annuity 
payments under the contract or the amount, if 
any, available for withdrawal under the contract 
on the date of death.’’. 
(c) RECAPTURE TAX FOR LIFETIME ANNUITY PAY-
MENTS.—Section 72 of such Code is amended by redesig-
nating subsection (w) as subsection (x) and inserting after 
subsection (v) the following new subsection (w): 
‘‘(w) RECAPTURE TAX FOR MODIFICATIONS TO OR 
REDUCTIONS IN LIFETIME ANNUITY PAYMENTS.—
‘‘(1) IN
GENERAL.—If any amount received 
under an annuity contract is excluded from income 
by reason of subsection (b)(5) (relating to lifetime 
annuity payments), and—
‘‘(A) the series of payments under such 
contract is subsequently modified so any future 
payments are not lifetime annuity payments, 
‘‘(B) after the date of receipt of the first 
lifetime annuity payment under the contract an 
annuitant receives a lump sum and thereafter is 
to receive annuity payments in a reduced 
amount under the contract, or 
‘‘(C) after the date of receipt of the first 
lifetime annuity payment under the contract the 
dollar amount of any subsequent annuity pay-
ment is reduced and a lump sum is not paid in 
connection with the reduction, unless such re-
duction is—
‘‘(i) due to an event described in sub-
section (c)(5)(A)(iii), or 
‘‘(ii) due to the addition of, or in-
crease in, a minimum period of payments 
within the meaning of subsection (c)(5)(C) 
or a minimum amount that must be paid 
in any event (within the meaning of sub-
section (c)(5)(D)), 
then gross income for the first taxable year in 
which such modification or reduction occurs 
shall be increased by the recapture amount.
‘‘(2) RECAPTURE AMOUNT.—
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the recapture amount shall be the 
amount, determined under rules prescribed by 
the Secretary, equal to the amount that (but for 
subsection (b)(5)) would have been includible in 
the taxpayer’s gross income if the modification 
or reduction described in paragraph (1) had 
been in effect at all times, plus interest for the 
deferral period at the underpayment rate estab-
lished by section 6621. 
‘‘(B) DEFERRAL
PERIOD.—For purposes 
of this subsection, the term ‘deferral period’ 
means the period beginning with the taxable 
year in which (without regard to subsection 
(b)(5)) the payment would have been includible 
in gross income and ending with the taxable 
year in which the modification described in 
paragraph (1) occurs. 
‘‘(3) EXCEPTIONS TO RECAPTURE TAX.—Para-
graph (1) shall not apply in the case of any modi-
fication or reduction that occurs because an annu-
itant—
‘‘(A) dies or becomes disabled (within the 
meaning of subsection (m)(7)),