midterm rate relief

L1: midterm rate reliefany one see any relief for those who believe that the 3.56% in a few years will seem as ridiculous as the 10-12% was a few years ago? got a 36yr old pre retiree who doesn’t really believe that 3.56 is a reasonable rate for her life expectancy.2003-04-21 13:20, By: ralphccbi, IP: [127.0.0.1]
L2: midterm rate reliefHello Ralph:
Needless-to-say, the IRS has spoken; e.g. max @ 120% of MT/AFR. It really doesn’t matter whether one thinks this is right or not; it just is. Further, I doubt there will be any new public rulings on this issue in the foreseeable future. However, I do see two/three windows of opportunity:
1. 12 – 24 months from now we could easily see 120% of MT/AFR @ 6%; then again it may be at 3%.
2. Remember that RR 2002-62 is drafted as a “safe harbor” ruling; e.g. follow rules 1,2,3,4 & 5 and your program of SEPPs “are considered to be SEPPs within the meaning of 72(t)(2)(A)(iv)…”. This does not mean that SEPP plans that do not follow the rules are automatically disallowed & therefore subject to the 10% penalty. However, this is extremely dangerous country. Thus, I see some windows of opportunity for private letter rulings:
A. Why shouldn’t a 45 year old, who must commit to at least a 15 year program be permitted to use 120% of LT/AFR as opposed to MT/AFR? Particularly since the minimum period (not life expectancy) of the program falls within the statutory definition of LT rates?
B. Under Notice 89-25 taxpayers could use annual recalculation in conjunction with the amortization & annuity ethods. Rev. Ruling 2002-62 pretty much killed this by the use of the word “FIXED”. However, again a PLR may suceed.

TheBadger
wjstecker@wispertel.net

2003-04-22 10:56, By: TheBadger, IP: [127.0.0.1]

L2: midterm rate reliefthanks for the feedback. even the irs will agree that a 36yr old has a long term time horizon til she changes her withdrawals so i agree they will need to at some time go to a time relevant value. i doubt it but hope its soon.2003-04-22 11:11, By: ralphccbi, IP: [127.0.0.1]

L2: midterm rate reliefHello Ralph:
You wrote:
“even the irs will agree that a 36yr old has a long term time horizon til she changes her withdrawals so i agree they will need to at some time go to a time relevant value. i doubt it but hope its soon.”
I think you & I conceptually agree; I doubt the IRS agrees. The IRS has already spoken via RR 2002-62; they think they are right, empowered to do so & generally beleive they were solving a bigger problem. In the near-to-intermediate term they WILL NOT change — unless forced to change. The mechanisms are twofold:
1. Intentionally design a program outside the boundaries of 2002-62; e.g electing a rate higher than 120% of MT/AFR; alerting the IRS on a return; forcing an audit; causing the penalties to be applied; then seeking relief via a law suit in Tax Court. As an aside, rarely does anyone do this as it is too dangerous a strategy.
2. File for a private letter ruling & sticking to your guns so to speak, forcing them into a corner by telling them that will have to issue a negative ruling to you unless they concede a higher interest rate based on the facts & circumstances. The AGCs office is moderately to very press conscious depending on the issue at hand & does not want to issue negative rulings on interpretative issues which this is.
TheBadger
wjstecker@wispertel.net
2003-04-23 08:37, By: TheBadger, IP: [127.0.0.1]

L2: midterm rate reliefHello Ralph:
I would like to add to my previous response both for your benefit and other readers as well. I actually refer to this situation in my book as the “audit lottery” and the importance of understanding which lottery you are in. In this case, there are three lotteries:
1. In certain circumstances, the precise answer one is after is found in the Internal Revenue Code directly as written by Congress and signed by the then President. As an example, IRC 72(t) gives us all of the 12 exceptions to the 10% surtax. There is no 13th and there is no catch-all exception “at the discretion of the Commissioner”. Thus, even though one might think up plausible exceptions 13, 14 and 15, don’t bother, they simply will not work. In general, attempting a law suit or even a PLR when the issue at hand is a challenge of the IRC itself is a fruitless endeavor; probability of success of 00.0001%.
2. In other circumstances, the IRC will specifically, and in writing, grant the authority/responsibility to the IRS to enact & enforce such regulations and rules as necessary to enforce a Code section. In these circumstances, IRS is literally “standing in Congress’s shoes” and is treated the same as (1) above. A good example is the determination of ST, MT & LT AFRs. IRC 1274(d)(B) basically tells the Secretary of the Treasury to go do it & to do it monthly. Here is a Congressionally mandated event & the Secretary dutifully complies. However, 1274(d) does not say how the Secretary is to do it, just to do it. Thus, the AFRs come out once a month and they are treated just as if Congress had passed a monthly amendment to the IRC itself. You might be able to develop several other methods to compute the AFRs that are different (and more favorable) than those used by the IRS. It doesn’t matter because the IRS has specifically, in this case, been ordered to perform a function but was also given the some discretion as to the computational mechanics. Thus, challenges in this area have a similarly low probability of success; somewhere around 00.0002%.
3. The third area involves situations where the Code itself is silent; no Congressional prerogatives have been issued and the IRS steps in with regulations/rules/notices to, so-to-speak, fill in the blanks. IRC 72(t) is one such situation. Now the IRS has issued RR 2002-62 and it should be treated as the law of the land; e.g. no one has stepped up to the plate with an assertion that the IRS has over-stepped its authority in issuing the ruling. On the one hand, a dead famous musician wrote: “Don’t tug on superman’s cape & don’t piss into the wind” (good words of wisdom with respect to defying a revenue ruling); on the other hand, a revenue ruling, particularly RR 2202-62 represents IRS safe harbor thinking which may or may not be correct; or, more importantly, not complete. What RR 2002-62 really says is three things: (a) all SEPP plans which fully comply with the ruling are “protected” (even if at some point in the future, implementing a SEPP plan under 2002-62 produces a silly result) from IRC 72(t)(4) & the 10% penalty; (2) SEPP plans we find (meaning the IRS) that do not fully comply with RR 2002-62 will most likely be challenged & penalties assessed; (3) the explicit language of a “safe harbor” ruling does not state or even imply that there are not other plans that would equally comply with the intent of 72(t)(2)(A)(iv); simply that they have not yet been presented for consideration.
Now, the absolute wrong thing for a taxpayer to do is to implement a SEPP plan in defiance of RR 2002-62 thinking that they “know better”; e.g. using an interest rate of 6% fits better with my financial plans so I will simply do it. This is the equivalent of tugging on superman’s cape and calling him bad names at the same time; essentially a guaranteed disaster. However, there are two methods or paths of solution:
(A) One could file a suit in Tax Court asking that the court overturn all or portion of RR 2002-62. I would not recommend this strategy for two reasons: (i) its relatively expensive; easily $10k to $20k or more; (ii) it represents a bold/frontal attack on the IRS asking the court to make new law & by inference discarding the old law as being wrong (something about checking wind direction before unzipping seems appropriate here). In short, there is a huge difference between telling the IRS they are wrong versus saying you have a circumstance unanticipated by their ruling.
(B) One can submit a private letter ruling request (PLR). PLRs are sometimes called “the making of law one taxpayer at a time” & are accordingly driven by the submitting taxpayer’s specific facts & circumstances. In this case, you are referring to a 36 year old starting a SEPP plan that would necessarily have a minimum plan period of 24 years; far beyond the statutory definition of a mid-term rate of 3 – 9 years. Thus, I think you would have a good case to prevail at using a rate different than 120% of MT/AFR & instead use 120% of LT/AFR or even 120% of the 24 year treasury bond thus resulting in an interest rate assumption in the 5.5% to 6% range. In this case, one would be making the assertion that this taxpayer’s facts & circumstances are outside (or on the fringe) of the rulings intended scope & that to be limited to 120% MT/AFR produces an illogical or unjust result.
Now, the result of submitting a PLR has several potential outcomes: (A) the IRS says your right, here is your favorable ruling; (B) the IRS says NO, we have spoken, your capped @ 120% of MT/AFR but we will afford you the opportunity to withdraw your ruling request & accordingly you withdraw the request — kind of no harm / no foul situation; (C) the IRS say NO & you say, okay IRS, then issue a negative ruling. Here is where it gets interesting. The IRS, more specifically the Assistant General Counsels Office is press conscious & does not like to issue negative rulings (in fact of the 100 rulings issued on 72(t), off hand I can only think of 2 that were negative). If pressed, the AGC’s office will “work with you” in an attempt to find a negotiated solution that both parties can then call a victory.
TheBadger
wjstecker@wispertel.net
2003-04-23 14:14, By: TheBadger, IP: [127.0.0.1]

L2: midterm rate reliefok badger, i like 3rd option. what is process and time frame for PLR? before she turns 59 1/2? lets hope! 2003-04-23 15:56, By: RALPHCCBI, IP: [127.0.0.1]

L2: midterm rate reliefHello Ralph:
Under the assumption that your client’s 2002 AGI is under $200,000 then the filing fee is $600; if the AGI is over $200,000, the filing fee goes up to $2400 or so. These are fees paid directly to the IRS as the submission fee. In addition, I strongly recommend that you hire a tax CPA (whether it be me or anyone else) that is skilled at PLR submissions to actually prepare the filing. Typically, this would take 12 – 20 hours of work so $1500 to $2500 in professional fees would be about right.
The wild card is always elapsed time. Invariably, this is most influenced the AGC’s staff availability and their backlog. From time of submission to actual receipt of the PLR can take as little as 6 weeks to as much as 6 months. This time of year I would think 8 – 12 weeks to about right; after Labor Day the time will go up materially.
TheBadger
wjstecker@wispertel.net
If you would like to discuss this further, drop me a note. 2003-04-23 17:15, By: TheBadger, IP: [127.0.0.1]

L2: midterm rate reliefRE: In this case, you are referring to a 36 year old starting a SEPP plan that would necessarily have a minimum plan period of 24 years; far beyond the statutory definition of a mid-term rate of 3 – 9 years. Thus, I think you would have a good case to prevail at using a rate different than 120% of MT/AFR & instead use 120% of LT/AFR or even 120% of the 24 year treasury bond thus resulting in an interest rate assumption in the 5.5% to 6% range.
Badger: I know you and GFW have been debating whether Qualified LIFE Annuities are subject to 2002-62. Based on the preceding comments, seems to me an argument can be made that a higher effective interest rate should be allowed (assuming, of course,the insurance company was willing to be so generous!). By definition, the “plan period” is annuitant’s life expectancy or the joint life expectancies of the annuitant and beneficiary, both of which are much longer than 9 years for someone under 59-1/2.2003-04-23 22:11, By: Owen, IP: [127.0.0.1]

L2: midterm rate reliefFar be it for me to debate with Gordon when it comes to annuities. Conceptually, annuities are easy; practically, they are very diffucult & I am certainly no expert. Again, conceptually, I agree with you & by inference I am suggesting that that the IRS has erred in RR 2002-62 through their limitation on interest rates; but, conversationally, I do nery clearly understand the problem they were/are attempting to solve; Ijust happen to believe that they solved it in an incorrect manner.

TheBadger
wjstecker@wispertel.net
2003-04-25 21:02, By: TheBadger, IP: [127.0.0.1]