Final answer:
An invalid exchange under Section 1035 would be exchanging an annuity contract for a life insurance policy, as this does not meet the like-kind exchange requirement set forth by the tax code.
Step-by-step explanation:
Invalid Exchange Under Section 1035
The question pertains to Section 1035 of the Internal Revenue Code, which addresses tax-free exchanges of certain types of insurance policies. Under Section 1035, certain exchanges are permitted without recognizing a gain or loss for tax purposes. These exchanges typically involve life insurance policies, annuity contracts, and endowment policies. However, not all exchanges are allowed. For instance, the exchange of an annuity contract for a life insurance policy is not a valid exchange under Section 1035. Such a transaction is deemed taxable as it does not meet the criteria outlined by the code, which requires like-kind exchanges for it to be non-taxable. Other valid examples under Section 1035 would include exchanging one annuity contract for another annuity contract, or one life insurance policy for another life insurance policy.