Benz v. IRS
L1: Benz v. IRSThe “Benz” case as it will certainly be referred to going forward was issued on 5/11/09. I have read and re-read this case as issued by the court) and beleive I now understand how the court came to its conclusions.
Because it is somewhat lengthy, Gordon was kind enough to edit it and post it in the Articles section at this website – give it a read if you are so interested & we may potentially get some lively debate.
Benz Case Article2009-05-13 21:33, By: TheBadger, IP: [188.8.131.52]
L2: Benz v. IRSIt certainly creates much food for thought.
The tax court’s position seems seem logical- especially based on the last sentence in IRC 72(t)(2)(E). I did not think so after the second reading; but after the third, I think they are right. 2009-05-13 23:10, By: Denise Appleby, IP: [184.108.40.206]
L3: Benz v. IRSHowever, the case never seems to address the specific limitations in 72t(4) to death and disability, which the court has effectively dismantled by this ruling.
I had thought that the references to the earlier exceptions were meant to establish a specific order for applying multiple exceptions. For example, the first home exception would be one of the last applied and that would prevent erosion of the 10,000 limit. Medical expenses would be one of the last in order to prevent the 7.5% floor from limiting the total exceptions that may apply.
I would think the IRS would appeal this since it opens a few more cans of worms, and I can see it causing an expansion of the problems already caused by all the 5329 forms.
If this case holds there are still more questions, eg will a SEPP participant be able to add all the other exceptions to the annual SEPP distribution, or can they just add some of them, or part of one of them? 2009-05-14 04:39, By: Alan S., IP: [220.127.116.11]
L4: Benz v. IRSHey Alan ,
From what I understand, it is saying that death and disability provides an exception to the recapture tax under IRC 72(t)(4). This allows the SEPP to be discontinued period!
When using another exception, such as higher education or first time homebuyer, the SEPP must be continued and the recapture tax is not an issue – therecfore itneed not be addressed specifically. Just as we have always understood that if the SEPP continues as it should without, the recapture tax is not an issue.
The summary opinion indicates that distributions under all of the other exceptions are permitted, in addition to the SEPP. If we go by the logic they use for 72(t)(2)(E), then we can extend that to 72(t)(2)(F) as it has the same language. This would mean that individuals can take distributions for any of the other exceptions without causing a modification. This includes:
Distributions for eligible medical expenses
Distributions to unemployed individuals for health insurance premiums
Payments to alternate payees pursuant to qualified domestic relations orders
Distributions due to a Levy
Distributions under the age-55 exception
Here is the kicker. If I understand the Tax Court’s position, when one reaches age 59 _, additional distributions (that would not be subject to the penalty because of reaching age 59 _), is also permitted. Now, this would be a big contradiction to the substantially equal payment theory- or would it?
It could be a good thing for taxpayers if the Tax Court is right. The individual who takes a SEPP usually take amounts that cover everyday expenses. Someone who started a SEPP (say) four years ago may not have anticipated needing extra withdrawals to cover unemployment-health-insurance or medical expenses. Many individuals make these withdrawals because they have nowhere else to turn. They are bombarded with information about the negative effects of taking distributions early and we would like to think that many would avoid taking these distributions if they could. When it comes to some of these exceptions, adding the 10% penalty would seem like making a bad situation worse for a taxpayer who feels he/she must tap into retirement funds just to cover necessary expenses.
Personally speaking, I hope the Tax Court is right. IMHO, it would seem to be only fair.2009-05-14 13:03, By: Denise Appleby, IP: [18.104.22.168]
L5: Benz v. IRSGood morning Denise:
Thank you for such a clear and organized analysis of the Benz case. For those of us not attuned to reading legal opinions, your description is very much appreciated.
I agree with you that when death or disability occurs, SEPP simply ends. Game over. I also think … hope … this rulling will extend to all of the other exceptons. That is only logical which, unfortunately, is foreign to the IRS and most Government agencies.
As to your point about reaching age 59 1/2 during a SEPP Plan and then possibly being relieved of completing the 5-year requirement, I don’t see this as a relief point. SEPP rules are pretty much set …5 complete years of distributionsAND reaching actual age 59 1/2. I believe a previous Tax Court ruling established this as the rule and I don’t see this ruling changing this point.
Now, if the IRS will get off their “high-horse,” use some common sense for once,and writerules alongthe lines ofyour description, then we can see some sound logic in our Government … something we desperately need today … and clean up a lot of coufusion and save a bunch of money for those of us actually paying taxes! I would like to see IRS Pub 590 include some of your wording in the exception section. Maybe we need to teach them how operate the”cut-n-paste” functionof a word processor.
Thanks again for you post.
Jim2009-05-14 14:04, By: Jim, IP: [22.214.171.124]
L6: Benz v. IRSHi, Jim
Reading Denise’s post again, I think she is contemplating a situation where relief from the tax court from busting a SEPP for taking education (and probably other penalty free additional distributions) would apply after age 59.5 as well as prior to 59.5, but that the plan would still have to be continued for at least 5 years. This would be true even though the education distribution is no longer an exception after age 59.5, but it WOULD be treated as such to prevent a SEPP from being busted in the same manner as if it occurred prior to 59.5. That seems a logical extension of the current ruling IF the IRS does not prevail against the tax court ruling.
I think that part of the tax court ruling is based not on a technical analysis of Sec 72, but on a softened taxpayer approach following the loss of billions of retirement assets in the meltdown. I think the federal govt in general feels somewhat guilty about their regulatory failures and some of these rulings may continue to extend the “bailout mentality” to certain taxpayer situations.
I still think that 72t requirements should be interpreted in IRS Regs. rather than a series of PLRs and tax court decisions that are expensive and seem to swing back and forth between strict interpretation and leniency, as well as exhibiting a degree of inconsistency (eg divorce effect on a SEPP).2009-05-14 23:39, By: Alan S., IP: [126.96.36.199]
L7: Benz v. IRSGood morning Alan:
I think we are all going in the same direction with this concept. Let me try an example to see what you think.
Assume a 58 year oldstarts aSEPP IRA which will terminate at age 63,and he has a separate, Non-SEPP IRA. At age 59 he takes a penalty-free, first-time home buyer distribution from the Non-SEPP IRA. Then at age 62 he takes a distribution from the SEPP IRA for education which, following the Benz Case logic, is also penalty-free.
We now have two different controlling elements to determine penalty-free status of the distributions. Age 59 1/2 is the controlling element for the Non-SEPP IRA, and the 5 years of distributions, not age 59 1/2,is the controlling element for the SEPP IRA. Of course if the SEPP IRA were started at age 51 and a distribution was made at age 55, then age 59 1/2 would controlsince the 5 year requirement would be satisfied first.
Jim2009-05-15 13:50, By: Jim, IP: [188.8.131.52]