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TITLE 26-INTERNAL REVENUE CODE sale, or other means of terminating such parent-subsidiary or controlled group rela- tionship, if such payment or distribution is made later than the end of the second cal- endar year after the calendar year in which occurs such sale or other transfer of assets, or such liquidation, sale, or other means of terminating such parent-subsidiary or con- trolled group relationship. (b) Taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school (1) General rule If- (A) an annuity contract is purchased- (I) for an employee by an employer de- scribea in section 501(c)(3) which is exempt from tax under section 501(a), or (ii) for an employee (other than an em- ployee described in clause (I)), who per- forms services for an educational organi- zation described in section 170(b)(1) (A)(ii), by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing, (B) such annuity contract is not subject to subsection (a), and (C) the employee's rights under the con- tract are nonforfeitable, except for failure to pay future premiums, then amounts contributed by such employer for such annuity contract on or after such rights become nonforfeitable shall be ex- cluded from the gross income of the employee for the taxable year to the extent that the ag- gregate of such amounts does not exceed the exclusion allowance for such taxable year. The employee shall include in his gross income the amounts received under such con- tract for the year received as provided in sec- tion 72 (relating to annuities). (2) Exclusion allowance (A) In general For purposes of this subsection, the exclu- sion allowance for any employee for the taxable year is an amount equal to the excess, if any, of- (I) the amount determined by multiply- ing 20 percent of his includible compensa- tion by the number of years of service, over (ii) the aggregate of the amounts con- tributed by the employer for annuity con- tracts and excludible from the gross income of the employee for any prior tax- able year. (B) Election to have allowance determined under section 415 rules In the case of an employee who makes an election under section 415(c)(4)(D) to have the provisions of section 415(c)(4)(C) (relat- ing to special rule for section 403(b) con- tracts purchased by educational institu- tions, hospitals, and home health service agencies) apply, the exclusion allowance for any such employee for the taxable year is the amount which could be contributed (under section 415) by his employer under a 'So In original. plan described in section 403(a) if the annu- ity contract for the benefit of such employ- ee were treated as a defined contribution plan maintained by the employer. (3) Includible compensation For purposes of this subsection, the term "includible compensation" means, in the case of any employee, the amount of compensa- tion which is received from the employer de- scribed in paragraph (1)(A), and which Is in- cludible in gross income (computed without regard to sections 105(d) and 911) for the most recent period (ending not later than the close of the taxable year) which under para- graph (4) may be counted as one year of ser- vice. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies. (4) Years of service In determining the number of years of ser- vice for purposes of this subsection, there shall be included- (A) one year for each full year during which the individual was a full-time em- ployee of the organization purchasing the annuity for him, and (B) a fraction of a year (determined in ac- cordance with regulations prescribed by the Secretary) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such or- ganization. In no case shall the number of years of ser- vice be less than one. (5) Application to more than one annuity contract If for any taxable year of the employee this subsection applies to 2 or more annuity con- tracts purchased by the employer, such con- tracts shall be treated as one contract. (6) Forfeitable rights which become nonforfeitable For purposes of this subsection and section 72(f) (relating to special rules for computing employees' contributions to annuity con- tracts), if rights of the employee under an an- nuity contract described in subparagraphs (A) and (B) of paragraph (1) change from forfei- table to nonforfeitable rights, then the amount (determined without regard to this subsection) includible in gross income by reason of such change shall be treated as an amount contributed by the employer for such annuity contract as of the time such rights become nonforfeitable. (7) Custodial accounts for regulated investment company stock (A) Amounts paid treated as contributions For purposes of this title, amounts paid by an employer described in paragraph 1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him for an annuity contract for his employee if the amounts are paid to provide a retire- ment benefit for that employee and are to be invested in regulated investment compa- ny stock to be held in that custodial ac- count. § 403 Page 304