John,

Your responses to question posed regarding a loss on a variable annunity contract would indicate a choice of where to claim the deduction. You have sited several sources for your conclusions. In reading through your commentary it would appear that you equated loss with unrecovered investment in the contract which is incorrect. My initial response, with which you seem to concurr, is correct with regard to a loss on a contract that has been surrendered. You have tried to include as part of this response the deduction for the unrecovered investment in an annunity contract which is totally different.

The deduction for the unrecovered investment which is included under Section 72(b)(3) applies to a decendent who owned an annuity and hadn't deducted his or her entire investment before his or her death. If the payments cease at his or her death then the remaining "unrecovered investment" is allowed as a deduction on the decedent's final return. If the payments continue to a beneficiary then the beneficiary is entitled to deduction. This deduction is included on Schedule A and is not subject to the 2% limitation. But this does not include the loss on the surrender of a policy as your response would seem to indicated.