Which of the following transactions does not result in taxable income for a modified endowment contract?

In the context of modified endowment contracts (MEC), it is important to understand how the tax treatment of withdrawals, loans, and other transactions operates. When a policyholder surrenders a MEC for an amount less than what they have paid into the policy, they do not receive taxable income. This is because the policyholder is effectively returning some of their investment in the contract rather than realizing a gain.

The key aspect here is that tax implications are generally tied to gains on the policy. If a policyholder surrenders a MEC and the cash surrender value is less than their total premiums paid, they are not realizing taxable income because the return of capital does not incur taxes. Only the portion that exceeds the total contributions would be subject to taxation if a gain was involved.

In contrast, fully cashing out the policy while active or taking a loan against the policy could potentially generate taxable income, depending on whether the transactions result in gains. Transferring a policy to a beneficiary typically involves tax ramifications as well, particularly if the death benefit exceeds the premiums paid, making it a potentially taxable event.

Therefore, surrendering the policy for less than the amount paid into it is the only transaction that would not result in taxable income in the context