Why is distribution code 4D on 1099-R taxable?

You may need to talk to a tax professional.  @dmertz 

First, code D indicates a non-qualified annuity.  That means you only pay tax on the portion of a withdrawal that represents earnings, not the contributions. Second, inherited annuities can't be rolled over to another annuity, but sometimes they can be rolled over to an inherited IRA.  Third, a non-qualified annuity can't be rolled over to an IRA.  It must be exchanged for a similar instrument via a section 1035 exchange.  

It seems most likely that your spouse withdrew the funds and used them to purchase a new annuity in his name.  In that case, the withdrawal is fully taxable according to the normal rules for withdrawals, and the tax consequences of buying a new annuity would follow whatever rules normally apply to buying an annuity.  

If you aren't sure what he did, you should have the paperwork reviewed by a tax professional. 

As Opus 17 said, a nonqualified annuity is not permitted to be "rolled over."  Nonqualified annuities can only be moved by performing a Section 135 exchange which would be reported with code 6 in box 7 of the Form 1099-R.  However, the codes 4 and D indicate that this was an inherited nonqualified annuity.  It's doubtful that an inherited annuity is permitted to be moved by Section 1035 exchange at all.

The code 4D indicates that the original annuity was cashed out, subject to taxation of the amount in excess of the investment in the contract.  The purchase of the new annuity is a completely independent transaction and the premium paid for the new annuity is the investment in that new, unrelated contract.