Source: https://www.immediateannuities.com/totalreturnannuities/taxes/notice-2004-15.html
Timestamp: 2019-04-20 04:40:22+00:00

Document:
Section 72 sets forth rules for the taxation of amounts received under an annuity contract. Section 72(q)(1) imposes a penalty tax on certain premature or early distributions under annuity contracts equal to ten percent of the amount that is includible in gross income. The penalty tax under § 72(q)(1) will not be imposed, however, if the distribution satisfies one of the exceptions set forth in § 72(q)(2). Section 72(q)(2)(D) provides that a distribution will not be subject to the penalty tax if it is "part of a series of substantially equal periodic payments (not less frequent than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and his designated beneficiary". If the payments are subsequently modified, § 72(q)(3) generally requires a taxpayer to take into account the penalty tax, plus interest, that would have been imposed if § 72(q)(2)(D) had not applied to the prior distributions.
Section 72(t)(1) imposes an additional tax on premature distributions from "qualified" annuity contracts (e.g., a § 403(b) annuity contract or a § 408 individual retirement annuity) that is similar to the penalty tax imposed by § 72(q). Section 72(t)(2)(A)(iv) also provides that the additional tax does not apply to a series of substantially equal periodic payments and § 72(t)(4) sets forth a recapture rule similar to the rule of § 72(q)(3).
Prior to 2002, Notice 89-25 provided that the additional § 72(t)(1) tax would be imposed if (i) at any time before attaining age 59 a taxpayer changed the distribution method to a method that does not qualify for the exception, or (ii) the taxpayer changed the distribution method within 5 years after the receipt of the first payment. Rev. Rul. 2002-62 modified Notice 89-25 by providing two exceptions to this rule. First, an individual is not subject to the § 72(t)(1) additional tax if (i) the payments are not substantially equal because the assets in the individuals account plan or IRA are exhausted, and (ii) the individual followed one of the prescribed methods of determining whether payments are substantially equal periodic payments. See Rev. Rul. 2002-62 § 2.03(a). Second, an individual who begins receiving distributions in a year using either the fixed amortization or fixed annuitization method may switch to the minimum distribution method for the year of the switch, and all subsequent years, and the change will not be treated as a modification within the meaning of § 72(t)(4). Any subsequent change, however, will be a modification for purposes of § 72(t)(4). See Rev. Rul. 2002-62 § 2.03(b).
The current language of § 72(q)(2) derives from § 1123(b)(2) of the Tax Reform Act of 1986, Pub. L. No. 99-514, (the "1986 Act"). The legislative history relating to the 1986 Act’s amendments to § 72 indicates that Congress intended that the additional income tax on early withdrawals should be the same for all tax-favored retirement savings arrangements and should be increased so that the additional tax serves, in most cases, to recapture a significant portion of the benefits of deferral of tax on income. See H. Rept. No. 99-426, 99th Cong. 1st Sess. 703-04 (1985), 1986-3 C.B. (vol. 2) 703-04; S. Rept. No. 99-313, 99th Cong. 2d Sess. 567 (1986), 1986-3 C.B. (vol. 3) 567.

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