WASHINGTON - The controversial "retirement CD" is in legal peril, putting the future of the annuity-like bank product in jeopardy.

A federal judge is expected to decide soon whether American Deposit Corp., inventors of the retirement CD, can block the Internal Revenue Service from eliminating the product's tax-deferred status.

Late last month, a U.S. District Court in Illinois said state insurance commissioners may ban the product.

American Deposit officials are more concerned with the tax case, because losing that fight threatens the underpinnings of the product.

Judge Paul Friedman of the U.S. District Court for the District of Columbia has heard from both sides and is expected to render his decision any day.

The IRS argued that Congress wanted only annuities issued by insurance companies to receive special tax treatment. American Deposit maintained that the IRS, rather than following the law, caved in to pressure from the insurance industry. Comments on the proposal are due July 17. The IRS plans to hold a hearing on its proposal Aug. 8.

The retirement CD, while similar to an annuity, is actually a bank product with partial Federal Deposit Insurance Corp. protection. Customers make a deposit that is supposed to accumulate interest tax free until a set date. Then, consumers can withdraw up two-thirds of the sum and receive the rest through regular payments for the rest of their lives.

A handful of banks offer the product, including Blackfeet National of Montana and First National Bank of Santa Fe.

The loss of the retirement CD would kill one of the industry's most promising opportunities to recoup the billions of dollars that have flowed into mutual funds and annuities, said David Roderer, a partner at Winston & Strawn who has followed the product closely.

"The ability to recapture that through a more competitive, insured product is quite significant," Mr. Roderer said. "It would bring back long- term deposits."

But, American Deposit might not survive long enough to finish the fight, said Joseph Ignat, the company's executive vice president. Since the IRS issued its proposal in April, sales of the product have ground to a halt.

The judge doesn't have to decide the merits of the case for American Deposit to win this first round. Rather, he must decide whether to grant an injunction blocking the IRS from collecting public comment on its proposal.

American Deposit said without the injunction, the company could collapse, making it impossible to benefit from any future court victory.

The Treasury Department countered that several federal laws prevent judges from blocking proposed rules.

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