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IRS Private Ruling 8919072


IRS Private Ruling 8919072

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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: February 17, 1989



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This letter is in response to your request for a ruling on behalf of Taxpayer H as to whether certain proposed distributions from an Individual Retirement Account (IRA) owned by Taxpayer H are part of a series of substantially equal periodic payments and are therefore not subject to the 10% additional tax imposed under section 72(t) of the Internal Revenue Code on early distributions. The ruling request, dated August 17, 1987, was modified in phone conversations with our office and by letters dated December 28, 1987, January 5 1988, and January 20, 1989.

According to the facts, Taxpayer H accepted an early retirement incentive offered by his company in November of 1986, at the age of 53. His retirement benefit was received as a lump sum distribution on December 2, 1986, which was then rolled over into a self-directed Individual Retirement Account (IRA) on December 23, 1986. Since accepting this early retirement incentive, Taxpayer H, now 55 years old, has sought only temporary employment in his field. Taxpayer H would like to start receiving distributions from his IRA account with the annual distribution amount to be determined by amortizing his account balance [*1] over a number of years equal to the joint life and last survivor expectancy of Taxpayer H and his spousal beneficiary (obtained from Table VI in section 1.72-9 of the Income Tax Regulations) at an assumed interest rate of earnings equal to the Long-Term Federal Rate used for purposes of section 1288(b) of the Internal Revenue Code. The annual distribution amount would be distriubted as 12 equal monthly payments.

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% 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 athe Code provides that section 72(t)(1) shall notapply 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 distributions excepted 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 disablity) 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 and last survivor expectancies for two lives (Table VI).

The proposed method for determining periodic annual payments described in the ruling request is to determine an annual payment as of January 1 of the distribution year by amortizing the account balance as of December 31 of the prior year over a number of years equal to the distribution year joint life and last survivor expectancy of the account owner and his spousal beneficiary (obtained from Talbe VI of section 1.72-9 of the regulations), assuming an interest rate of return equal to the Federal Long-Term Rate (compounded monthly) which is used for purposes of Code section 1288(b) and which is in effect for December of the prior year. The annual distribution amount will be distributed as equal monthly payments. The annual distribution amount will be recalculated each year in the same manner using the applicable interest rate and life expectancy. The joint life and last survivor expectancy and the interest rate used ares such that they do not result in the circumvention of the requirements of sections 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 (as modified) of determining periodic payments results in substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) of the Code. Accordingly, such payments will not be subject to the additional tax of section 72(t) unless the requirements of section 72(t)(4) are not met.

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

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Copyright 2002 John P. Greaney, All rights reserved.

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