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IRS Private Ruling 8911071


IRS Private Ruling 8911071

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"This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal Revenue Code."

Annuities: Endowment and Life Insurance


DATE: December 22, 1988



* * *

This letter is in response to your request for a ruling on behalf of Taxpayer M as to whether certain proposed calculations of distributions from an Individual Retirement Account (IRA) owned by Taxpayer M are part of a series of substantially equal periodic payments as described in section 72(t)(2)(A)(iv) of the Internal Revenue Code. The original ruling request, dated May 17, 1988, was subsequently modified in phone conversations with our office and by letters dated December 12, 1988, and December 13, 1988.

According to the facts, Taxpayer M is 43 years old and is the owner of an Individual Retirement Account (IRA). Taxpayer M wants to start receiving distributions from his IRA account. The annual distribution amount is to be determined each year by amortizing the account balance as of January 1 of that year over the life expectancy of the account owner, at an assumed interest rate of return. Beginning in 1989, distributions will be made on a monthly basis. The life expectancy is to be obtained from Table V of section 1.72-9 of the Income Tax Regulations and the interest rate to be used is the average of the Adjusted Federal Long Term Rates used for purposes [*1] of section 382 of the Internal Revenue Code for the prior 12 months.

Section 408(d) of the Internal Revenue Code provides that amounts paid or distributed out of an individual retirement plan must be included in gross income by the payee or distributee in the manner provided under section 72 of the Code.

Section 72 of the Internal Revenue Code provides rules for determining how amounts received as annuities, endowments, or life insurance contracts and distributions from qualified plans are to be taxed.

Section 72(t)(1) of the Internal Revenue Code provides for the imposition of an additional 10% tax on early distributions from qualified plans, including IRAs. The additional tax is imposed on that portion of the distribution which is includible in gross income. Section 72(t)(2)(A)(iv) of the Code provides that section 72(t)(1) shall not apply to distributions which are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his beneficiary.

Section 72(t)(4) of the Code imposes the additional limitation on distributionsexcepted from the 10% tax by section 72(t)(2)(A)(iv) that if the series of payments is subsequently modified (other than by reason of death or disability) before the later of (1) the close of the 5-year period beginning with the date of the first payment, and (2) the employee's attainment of age 59 1/2, then the taxpayer's tax for the first taxable year in which such modification occurs shall be increased by an amount determined under regulations, equal to the tax which would have been imposed except for the section 72(t)(2)(A)(iv) exception, plus interest for the deferral period.

Section 1.72-9 of the regulations provides tables that are to be used in connection with computations under section 72 and the regulations thereunder. Included in this section are tables giving life expectancies for one life (Table V) and joint life expectancies for two lives (Table VI).

The proposed method for determining periodic payments described in the ruling request is to amortize the January 1 account balance over a number of years equal to the account owner's live expectancy (obtained from Table V of section 1.72-9 of the regulations) and assuming an interest rate of return equal to the average Adjusted Federal Long Term Rate for the prior year. The average Adjusted Federal Long Term Rate will be the average of the monthly Adjusted Federal Long Term Rates used for purposes of Code section 382 for the 12 months prior to January 1. Under the proposed method, the periodic annual payment will be recalculated each year as of January 1 with such payment to be distributed on a monthly basis. The life expectancy and the interest rate used to determine the periodic payments are such that they do not result in the circumvention of the requirements of section 72(t)(2)(A)(iv) and 72(t)(4) of the Code (through the use of an unreasonably high interest rate or an unreasonable life expectancy).

Accordingly, we conclude that the proposed method of determining periodic payments results in substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) of the Code.

Sincerely yours,
James E. Holland, Jr.
Chief, Pension Actuarial Branch

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