"their notes separated the funds as qualified and non-qualified but when they were given to Company C, they were commingled and all put into the same qualified annuity."

Thanks for the review.

Once the funds were removed from the IRA, they are just like any other funds your taxpayer can spend. That large distribution event is taxable.

Once the funds were removed from the nonqualified plan, which typically is taxed while the taxpayer worked there and had the "rights" to the funds, only earnings would be taxable, when distributed. This is because a nonqualified plan typically is a salary or compensation deferral plan, which is taxed as compensation at the time awarded (think of how a bonus might work) but not given to the employee (so, not yet income). It is not unusual for a nonqualified plan to tax only Medicare and Social Security, then the FIT is part of the disbursement event (when they still work for them). So, once distributed, it's just like any other funds your taxpayer can spend. That partial event is taxable; the other part likely was taxed on a W2 year(s) ago.

So, there is no commingle. There is only Taxpayer's own funds. And the sale is the wrong product. The taxpayer is now exposed to double taxation.

A non-qualified annuity is purchased with after-tax dollars, so that only the earnings are taxed. A qualified annuity would continue to shelter tax deferred funds.

"A qualified annuity is one that has been purchased with pre-tax dollars... Only the earnings of a non-qualified annuity are taxed at the time of withdrawal, not the contributions, as they are after-tax money."

https://www.investopedia.com/terms/q/qualified-annuity.asp

Don't let the taxpayer work with the same people. They already made a mess.