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TITLE 26-INTERNAL REVENUE CODE is to be treated as an individual retirement ac- count of such spouse, and not of such individ- ual. Thereafter such account, annuity, or bond for purposes of this subtitle is to be treated as maintained for the benefit of such spouse. (e) Tax treatment of accounts and annuities (1) Exemption from tax Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an indi- vidual retirement account by reason of para- graph (2) or (3). Notwithstanding the preced- ing sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations). (2) Lois of exemption of account where employee engages in prohibited transaction (A) In general If, during any taxable year of the individ- ual for whose benefit any individual retire- ment account is established, that individual or his beneficiary engages in any transac- tion prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year. For purposes of this paragraph- (i) the individual for whose benefit any account was established is treated as the creator of such account, and (ii) the separate account for any individ- ual within an individual retirement ac- count maintained by an employer or asso- ciation of employees is treated as a sepa- rate individual retirement account. (B) Account treated as distributing all its assets In any case in which any account ceases to be an individual retirement account by reason of subparagraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) applies as if there were a dis- tribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day). (3) Effect of borrowing on annuity contract If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day. (4) Effect of pledging account as security If, during any taxable year of the individual for whose benefit an individual retirement ac- count is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as dis- tributed to that individual, (5) Purchase of endowment contract by individual retirement account If the assets of an individual retirement ac- count or any part of such assets are used to purchase an endowment contract for the benefit of the individual for whose benefit the account is established- (A) to the extent that the amount of the assets involved in the purchase are not at- tributable to the purchase of lif.a insurance, the purchase is treated as a rollover contri- bution described in subsection (d)(3), and (B) to the extent that the amount of the assets involved in the purchase are attribut- able to the purchase of life, health, acci- dent, or other insurance, such amounts are treated as distributed to that individual (but the provisions of subsection (f) do not apply). (6) Commingling individual retirement account amounts in certain common trust funds and common investment funds Any common trust fund or common invest- ment fund of individual retirement account assets which is exempt from taxation under this subtitle does not cease to be exempt on account of the participation or inclusion of assets of a trust exempt from taxation under section 501(a) which is described in section 401(a). (f) Additional tax on certain amounts included in gross income before age 59Y2 (1) Early distribution from an individual retire- ment account, etc. If a distribution from an individual retire- ment account or under an individual retire- ment annuity to the individual for whose benefits such account or annuity was estab- lished is made before such individual attains age 59V2, his tax under this chapter for the taxable year in which such distribution is re- ceived shall be increased by an amount equal to 10 percent of the amount of the distribu- tion which is includible in his gross income for such taxable year. (2) Disqualification cases If an amount is includible in gross income for a taxable year under subsection (e) and the taxpayer has not attained age 591 before the beginning of such taxable year, his tax under this chapter for such taxable year shall be increased by an amount equal to 10 per- cent of such amount so required to be includ- ed in his gross income. (3) Disability cases Paragraphs (1) and (2) do not apply if the amount paid or distributed, or the disqualifi- cation of the account or annuity under sub- section (e), is attributable to the taxpayer be- coming disabled within the meaning of sec- tion 72(m)(7). (g) Community property laws This section shall be applied without regard to any community property laws. (h) Custodial accounts For purposes of this section, a custodial ac- count shall be treated as a trust if the assets of such account are held by a bank (as defined in section 401(d)(1)) or another person who dem- onstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the require- ments of this section, and if the custodial ac- count would, except for the fact that it is not a trust, constitute an individual retirement ac- Page 319