PLR 1030038: IRS ruled a divorce transfer did not modify IRA payments

Plain-English summary

The IRS ruled on a taxpayer's transfer of part of an IRA to a former spouse under a divorce agreement. It concluded that the transfer was nontaxable under IRC § 408(d)(6). It also concluded that reducing the taxpayer's substantially equal periodic payments after the transfer would not be a prohibited modification under IRC § 72(t)(4), so the 10 percent additional tax would not apply on that basis. The ruling assumed that the original payment series satisfied the applicable requirements and that the IRA met IRC § 408(a).

Ruling snapshot

• Question: Was the divorce-related IRA transfer nontaxable, and would the reduced payments trigger the additional tax?
• Outcome: Approved
• Key authorities: IRC §§ 408(d)(6), 72(t)(2)(A)(iv), and 72(t)(4); Rev. Rul. 2002-62

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

WASHINGTON, D.C. 20224

201030038

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAY 05 2010

Uniform Issue List: 72.20-04

SE:T:EP:RA:T1

Legend

Taxpayer A = **
Taxpayer B = **
IRA X = **
Company C = **
Amount E = $**
Amount G = $**
Percent H = **
County L = **
State M = ***

Dear ***:

This is in response to a letter dated ** as supplemented by communication
dated ** submitted on your behalf by your authorized representative, in which
you ask whether a distribution from your individual retirement arrangement to your former
spouse is considered a modification to a series of substantially equal periodic payments
within the meaning of section 72(t)(4) of the Internal Revenue Code (the "Code").

The following facts and representations have been submitted on your behalf.

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Taxpayer A began taking a series of periodic payments from an individual retirement
arrangement (IRA X) she maintains with Company C. Taxpayer A will attain age 59 1/2 on
** Taxpayer A elected to have distributions from IRA X commence in a series
of substantially equal periodic payments as described in Section 2 of Revenue Ruling
2002-62, 2002-42 I.R.B. 710. Specifically, Taxpayer A used the fixed annuitization method
to determine the annual distributions from IRA X. The distributions from IRA X began on
** and were intended to comply with the requirements of section 72(t)(2)(A)(iv)
of the Code. The annual distribution from IRA X is Amount E. Taxpayer A's series of
substantially equal periodic payments are made on a monthly basis in the amount of
Amount G. Taxpayer A received distributions from IRA X on a monthly basis in the amount
of Amount G from * through *, Taxpayer A will continue to receive the same
distribution of Amount G until the division of IRA X.

On ** a judgment of divorce was granted to Taxpayer A and Taxpayer B by
Final Decree of the Family Court of State M in and for County L (“Final Decree”). A
property settlement agreement was entered into by Taxpayer A and Taxpayer B, the terms
of which are contained in a Marital Stipulation Agreement and Order in County L, State M
dated ** ("Stipulation Agreement"). The Stipulation Agreement included a
division of Taxpayer A and Taxpayer B's property, including IRA X. The Stipulation
Agreement requires that Taxpayer B is granted a portion of the value of IRA X, and also
provides Taxpayer A the right to request a private letter ruling from the Internal Revenue
Service in order to avoid a penalty.

Taxpayer A shall keep the first $xxx,xxx of the value of IRA X plus Percent H of the value
in excess of $xxx,xxx. However, any gross distributions made to Taxpayer A between
* and the actual division of IRA X will be attributed to Taxpayer A. Pursuant to the
Stipulation Agreement, a portion of the value of IRA X is awarded to Taxpayer A pursuant
to the following formula: (Percent H) [(balance at date of division of IRA X) - $xxx,xxx -
(Amount G)(number of months between ** through the month containing the date
of the actual division of IRA X)] + $xxx,xxx. The balance of IRA X will be transferred to
Taxpayer B. It is represented that the Stipulation Agreement and Order is a "divorce or
separation instrument" within the meaning of Code section 408(d)(6) and as described in
Code section 71(b)(2)(A).

As a result of the proposed transfer of a portion of the value of IRA X to Taxpayer B, the
account balance of IRA X will be reduced accordingly. Using this reduced account balance
on which to calculate her series of substantially equal periodic payments would result in a
distribution of an amount less than the amount determined when Taxpayer A commenced
receiving her periodic payments from IRA X. Taxpayer A intends to use the same fixed
annuitization methodology to calculate her future payments from IRA X.

Based on the foregoing, Taxpayer A requests the following rulings:

1. The proposed division of IRA X and the proposed transfer of a certain portion from IRA

X to Taxpayer B pursuant to the Stipulation Agreement will be considered a nontaxable
transfer under Code section 408(d)(6).

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2. The reduction in the monthly distribution from IRA X to Taxpayer A beginning in the
   month following the month of division of IRA X, prior to Taxpayer A attaining age 59 1/2,
   will not constitute a modification to a series of substantially equal periodic payments from
   IRA X under Code section 72(t)(4) that will result in the imposition of the 10 percent
   additional tax under Code section 72(t)(1) for IRA X.

Section 408(d)(1) of the Code provides that, except as otherwise provided in section
408(d), any amount paid or distributed out of an IRA shall be included in gross income by
the payee or distributee, as the case may be, in the manner provided under section 72 of
the Code.

Section 72 of the 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 Code provides for the imposition of an additional 10 percent tax on
early distributions from qualified plans, including IRAs. The additional tax is imposed on
that portion of the distribution that 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 that 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 joint lives
(or joint life expectancies) of such employee and his designated beneficiary.

Section 72(t)(4) of the Code imposes the additional limitation on distributions excepted
from the 10 percent 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 the
employee's attainment of age 59 1/2 or the close of the five-year period beginning with the
date of the first payment and after the employee attains 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 that would have been imposed
except for the section 72(t)(2)(A)(iv) exception, plus interest for the deferral period.

Section 408(d)(6) of the Code provides that an individual's IRA interest transferred to a
spouse or former spouse pursuant to a decree of divorce or separation instrument
described in subparagraph (A) of section 71(b)(2) is not treated as a taxable transfer made
by such individual notwithstanding any other provision of this subtitle, and is treated as an
IRA of such spouse and not of the original IRA owner. Thereafter such transferred interest
is to be treated as maintained for the benefit of such spouse.

Notice 89-25 was published on March 20, 1989, and provided guidance, in the form of
questions and answers, on certain provisions of the Tax Reform Act of 1986 (TRA '86). In
the absence of regulations under section 72(t) of the Code, this notice provides guidance
with respect to the exception to the tax on premature distributions provided under section
72(t)(2)(A)(iv). Question and Answer-12 of Notice 89-25 provides three methods of

201030038

determining substantially equal periodic payments for purposes of section 72(t)(2)(A)(iv) of
the Code.

Revenue Ruling 2002-62, 2002-42 I.R.B. 710, which was published on October 21, 2002,
modified Q&A-12 of Notice 89-25. Revenue Ruling 2002-62 provides, among other things,
that payments are considered to be substantially equal periodic payments within the
meaning of section 72(t)(2)(A)(iv) if they are made in accordance with the required
minimum distribution method, the fixed amortization method or the fixed annuitization
method.

The fixed annuitization method provides that the annual payment for each year is
determined by dividing the account balance by an annuity factor that is the present value
of an annuity of one ($1) dollar per year beginning at the taxpayer's age and continuing for
the life of the taxpayer (or the joint lives of the individual and beneficiary). The annuity
factor is derived using the mortality table in Appendix B of Revenue Ruling 2002-62 and
using the chosen interest rate. Under this method, the account balance, the annuity factor,
the chosen interest rate and the resulting annual payment are determined once for the first
distribution year and the annual payment is the same amount in each succeeding year.

In this case, Taxpayer A commenced receiving a series of substantially equal periodic
payments from IRA X in *. In satisfaction of the terms of the Stipulation Agreement
which was finalized on ** a portion of the value of IRA X is awarded to
Taxpayer B and will be transferred to an individual retirement account in his own name.
Pursuant to section 408(d)(6) of the Code, the proposed transfer from IRA X to Taxpayer B
pursuant to the Stipulation Agreement, is considered to be a nontaxable transfer from IRA
X by Taxpayer A and the portion of the IRA X account balance that will be transferred
ceases to be the property of Taxpayer A's IRA X at the time of the proposed transfer and
can no longer be used to calculate Taxpayer A's subsequent payments from IRA X. The
proposed transfer will reduce the IRA X account balance, which means that the IRA X
account balance on which Taxpayer A will use to calculate her subsequent payments,
using the same methodology, for the series of payments beginning in ** in the month
following the month of division of IRA X, will produce an annual distribution that is less than
the amount calculated when she commenced to receive the series of substantially equal
periodic payments from IRA X.

In view of the foregoing, we conclude that the proposed division of IRA X and the transfer
of a certain portion from IRA X to Taxpayer B pursuant to the Stipulation Agreement will be
considered a nontaxable transfer under Code section 408(d)(6). We also conclude that the
reduction in the monthly distribution from IRA X to Taxpayer A beginning in the month
following the month of division of IRA X, prior to Taxpayer A attaining age 59 1/2, will not
constitute a modification to a series of substantially equal periodic payments from IRA X

under Code section 72(t)(4) that will result in the imposition of the 10 percent additional tax
under Code section 72(t)(1) for IRA X.

This ruling does not express an opinion as to whether (but assumes that) the series of
substantially equal periodic payments received from IRA X satisfy Code section

201030038

72(t)(2)(A)(iv) and Revenue Ruling 2002-62. This ruling also assumes that IRA X satisfies
the requirements of Code section 408(a) at all times relevant to this transaction.

No opinion is expressed as to the tax treatment of the transaction described herein under
the provisions of any other section of either the Code or regulations which may be
applicable thereto.

This letter is addressed only to the taxpayer who requested it. Section 6110(k)(2) of the
Code provides that it may not be used or cited as precedent.

A copy of this letter ruling has been sent to your authorized representative pursuant to a
power of attorney on file in this office.

If you have any questions about this ruling, please contact * (Identification Number
) at () -. Please address all correspondence to **,

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Deleted Copy of Letter Ruling
Notice of Intention to Disclose