Well at least the IRS has been consistent for the last 33 years on this subject. Notice 89- 25, Rev. Rule 2002-62 and Notice 2022-6 all start with very similar language:
"Payments will be considered to be substantially equal periodic payments within the meaning of IRC §72(t)(2)(A)(iv) if they are made in accordance with one of the three calculation methods described [following]."
This is "safe harbor" language in the sense that the IRS is extending a promise: use one of the three methods we have described and you are safe from the application of IRC §72(t)(4) — the dreaded recapture tax and interest. What this section could have said, but does not, is: The methods available for use are... or the only applicable methods are... or any method other than the three will be treated as not within the meaning of... In short, the IRS describes three methods, each with there own computational peculiarities AND THEN offers a "tentative back door" by saying there might be other methods that are okay as well, we (meaning the IRS) just don't know what they are.
So we are going to build an authoritative case supporting annual recalculation. Not dissimilar to a chair and chairs have multiple legs.
1st leg — is above; the existence of the back door that other methodologies exist; or, at least, other implementation strategies of existing methods exist.
2nd leg — recalculation is not a new concept. Actually, it's the reverse; the minimum method1 requires annual recalculation. As discussed in other articles, the minimum method did not have to require annual recalculation but it does. If it were absent, traditional IRAs could become perpetual tax deferred savings accounts!
3rd leg — during the period 1990 through 2000, approximately six private letter rulings were issued precisely "on point". All six rulings were in the affirmative. Further, this time period might have been referred to as the "new frontier", many of these rulings took advantage of the annual recalculation concept by requesting some unusual features such as: update the taxpayer's account balance (probably because it went up) but leave the interest rate and life expectancy fixed for the duration of the taxpayer's plan. Thus, these six PLRs, remembering that PLRs, pursuant to IRC §6110 can not be used as precedent (most of the time) give us an unofficial peek behind the curtain — so to speak, in our favor, but not necessarily a strong leg.
4th leg — the IRS regularly issues General Information Letters — and they are free.
WHAT — Information letters call attention to a well-established interpretation or principle of tax law (including a treaty) without applying it to a specific set of facts.
WHEN — The Service makes information letters available on a quarterly basis for public inspection and copying. The purpose of releasing these letters is to increase public confidence that the tax system operates fairly and in an even-handed manner with respect to all taxpayers.
WHO — [IRS] managers must review responses to inquiries before they are issued to ensure that the responses provide general information and are not substitutes for letter rulings and that the responses do not pertain to a pending request for a letter ruling, technical advice memorandum, or chief counsel advice, or to any investigation, audit, litigation, or other enforcement action.
WHY — Information letters are advisory only and have no binding effect on the Service.
In 2000, the IRS issued a general information letter that was absolutely on point.
It says: "If payments are recalculated each year using the [amortization or annuitization] method, then payments would be recalculated in the same manner, using the account balance as of the same day each year, the applicable life expectancy (or life expectancies), and the same interest rate "standard" in effect for the same period of the year, which must provide an interest rate that does not exceed a reasonable interest rate on the date payments commence."
Manager of Employee Plans Actuarial Group II,
Tax Exempt & Government Entities Division of the
Assistant General Counsel's Office
This 4th leg is crucial — we finally get precise words with which to work. Remembering that this document was issued in 2000; before Revenue Ruling 2002-62, it is our 1st publicly issued document upon which we can rely to tell us how to tactically implement annual recalculation. Further, it is well written to point that it stands for itself not really requiring further interpretation. Practioners read this and immediately came to three conclusions:
(1) Annual Recalculation is approved (in theory); the IRS just said so.
(2) Therefore, no more need for future PLRs on this subject.
(3) Implementation — simple; pick a day (any day, but 12/31 is awful convenient) and on that day, update ALL three variables in the formula with new values; press calculate and that's the new distribution amount for the year; and further, do it for every year in the taxpayer's distribution plan.
Are we done with four legs — we all thought so but two years later we get Revenue Ruling 2002-62 which repeats and strengthens the language on the trilogy of safe harbor methods2 — further, there is absolutely no mention of annual recalculation using amortization or annuitization. Are we back to square one? Has the IRS reversed itself from two years ago?
5th leg — In the 24 to 36 months subsequent to Revenue Ruling 2002-62, an additional nine PLRs were specifically issued on the recalculation issue. All 9 were affirmative. All 9 essentially captured the language from the General Information Letter issued in 2000 — essentially do it right; no monkey business allowed in cherry-picking which variables to update. Further, newly issued Noticed 2022-6 replicates Revenue Ruling 2002-62 as to the three methods and again makes no mention of annual recalculation. Do we therefore need another nine PLRs issued in 2023 - 2024 to re-affirm / re-institute annually recalculated amortization? We certainly hope not; however it too early to tell. New PLRs with respect to Notice 2022-6 will most likely not be printed for public review until sometime in late 2023.
Finally, we have a 5-legged chair which is pretty sturdy. Can we rely on this chair — can we sit upon it comfortably in light of the downside risks? This author thinks so. Too many legs creates too much authority (even when the IRS would like you to think that there isn't any) that the IRS would be facing an unfounded up hill battle to disallow a properly structured and executed annually recalculated plan.
© William J. Stecker, CPA
1 Please note the use of the words: "minimum method", not the "required minimum method" even though Rev. Rule 2002-62 and Notice 2022-6 do use this language. The minimum method is available to all taxpayers in many computational circumstances. This method is only REQUIRED when one is age 72 or older and one wishes to not pay the excess accumulations tax. So, the IRS's use of "required" in our case is a fiction. It is nothing more than the IRS's attempt (and they are pretty good at it) at language steering.
2 There is a key difference, often overlooked, in language change between Notice 89-25 and Revenue Ruling 2002-62. The original Notice described the amortization and annuitization methodologies; both computational and their "safe harbor" status. The Notice never used the word "FIXED". Instead, Revenue Ruling 2002-62 snuck in the adjective "fixed" and no one really noticed. As a result, the methodologies that are safe harbored appear to have materially narrowed. This whole methodologies section of both Revenue ruling 2002-62 and Notice 2022-6 could have been drafted in a dozen different ways; the IRS clearly chose the most restrictive way possible to the disadvantage of taxpayers. Further, where does the IRS get the authority to restrict safe harbors originally made available 13 years previously as well as overrule a general information letter. We think the IRS has overstepped it bounds here; then again, they are the 800 pound gorilla in the room.
