This article was updated on October 1, 1999.
Ltr. Rul. 199909059 (12/10/98)
Your authorized representative submitted the following facts and representations with the request:
Taxpayer A left a stock brokerage firm in 1990, and received a distribution of qualified retirement plan benefits totaling $1,233,045. Of this amount, he retained and paid taxes on $233,045, and made a rollover contribution to IRA W, an individual retirement arrangement under section 408(a) of the Internal Revenue Code ("Code"). The account balance of IRA W as of December 31, 1997, was $9,191,399. Taxpayer A's date of birth is _____. The date of birth of Taxpayer A's wife and beneficiary is _____.
Taxpayer A has directed the investment of IRA W from its inception through the present day. He began taking periodic distributions from IRA W in January 1993, when he was 44 years old. Each year's withdrawal has been in the amount of $176,499, representing an annuity calculated to exhaust the balance of IRA W as of December 31, 1992 ($2,582,180), based on a joint and survivor life expectancy of 44.6 years and an applicable federal rate of 6.8 percent. 1992 ($2,582,180), based on a joint and survivor life expectancy of 44.6 years and an applicable federal rate of 6.8 percent.
As a result of substantial appreciation in IRA W, Taxpayer A desires to modify the basis on which periodic distributions will continue to be made, effective for 1998 and subsequent years. The proposed method for determining annual periodic payments, as modified, will be to calculate an annual payment by amortizing the account balance (determined as of the third Monday in each January or the next day on which the securities markets are open) over Taxpayer A's remaining life expectancy using a reasonable interest rate. For this purpose, life expectancy will be determined for purposes of the initial payment using Table V of section 1.72-9 of the regulations, starting with 33 years for the 1998 distribution and reducing that figure by one for each subsequent year through 2030. A constant annual interest rate of 7.2 percent (the rate under Code section 7520 for January, 1998) will be assumed for each year's distribution.
For example, for 1998, the distribution will be $672,280, based on an account balance of $9,000,284 as of January 19, 1998, a life expectancy of 33 years, and interest of 7.2 percent. For 1999, the distribution will be based on the account balance as of January 18, 1999, a life expectancy of 32 years, and interest of 7.2 percent.
Taxpayer A realizes that this action will amount to a modification of the series of withdrawals commenced in 1993, and will require the payment of the additional 10 percent penalty, plus interest, on the withdrawals taken in the years 1993 through 1997 pursuant to Code section 72(t)(4).
Based on the foregoing facts and representations, your authorized representative requests the following ruling:
That following the modification of the distributions to Taxpayer A from IRA W, the withdrawals will satisfy the requirements under Code section 72(t)(2)(iv) as amounting to equal periodic payments over the taxpayer's life expectancy, and the withdrawals will therefore not be subject to the 10 percent additional tax under Code section 72(t)(1).
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Based on the method of determining periodic payments described above, with respect to the taxpayer's ruling request, we conclude that this method of determining periodic payments satisfies one of the methods described in Notice 89-25 and results in substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv). The life expectancies and the interest rate used are such that they do not result in the circumvention of the requirements of section 72(t)(2)(A)(iv) and 72(t)(4) (through the use of an unreasonable interest rate or unreasonable life expectancies) and that the proposed method of payments, as modified, is reasonable. Therefore, 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.
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Copyright © 1999 John P. Greaney, All rights reserved.