5-Year Rule

L1: 5-Year RuleI thought a saw a PLR which stated that the 5-year rule always ends on 12-31 after the full5-year period ends. However, it sounds like the Q&A below is only in reference to annual distributions. So, I assume that if someone under the 5-year rule started annual distributions beginning 1-1-03 they would have flexibility after 12-31-07 (technically 1-1-08)?
Also, if someone under the 5-year rule begins MONTHLY72t distributions on 2-1-03, would their plan become flexible after 2-1-08, 3-1-08, or 12-31-08?
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Q. Assuming the 5-Year rule, when can payments be modified? A. In 1998, a tax court held that a payment received by a taxpayer after he received five equal annual installments and after he reached age 59-1/2 was a modification of the Substantially Equal Periodic Payments. The Court held that the modification occurred within the 5-year period beginning with the first payment, thus triggering the recapture of the 10-percent penalty tax. The Service argued that the 5-year period began with the first distribution and ran until the end of the 5th year. The tax court agreed – the 5-year period closes at the end of the 5 years beginning with the first distribution, and does not end on the date of the 5th annual distribution. Arnold v. Comm., 111 TC No. 12 (1998). 2003-01-17 00:19, By: Burk, IP: [127.0.0.1]

L2: 5-Year RuleEnter the information in our Last Payment Date calculator – look in the left menu. It will calculate the date that the first payment modification can be made.2003-01-17 17:09, By: Gfw, IP: [127.0.0.1]

L2: 5-Year RuleHello Burk:
The operative language is: “before the close of the 5-year period beginning with the date of the first payment”. The IRC does not say “5 tax years” or “5 installments within a 5 year period”. The IRC requires a pure calendar measurement. You always know your 1st payment date; simply jump forward 5 years and you have your ending date. Further, if Congress has intended something different, they would have said something different, as they have in other sections of the IRC.
In the case of Arnold v Commissioner, Arnold took 5 equal distributions in 5 different tax years spanning 38 months on the calendar & then took a sixth distribution before 5 calendar years had expired therefore causing a modification.
Therefore, to answer you fundamental question, if you commenced monthly distributions on 2/1/03, you will have satified the 5-year period on 1/31/08.
TheBadger
wjstecker@wispertel.net
2003-01-18 08:36, By: TheBadger, IP: [127.0.0.1]