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Section 72.-Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
This notice provides guidance regarding when a distribution from a non-qualified annuity will satisfy § 72(q)(2)(D) and, therefore, be exempt from the penalty tax imposed by § 72(q)(l). Specifically, the Internal Revenue Service (1RS) and Treasury will treat a distribution as satisfying § 72(q)(2)(D) if the taxpayer uses one of the methods described in Notice 89-25, 1989-1 C.B. 662, as modified by Rev. Rul. 2002-62, 2002-2 C.B. 710, to determine whether the payment is part of a series of substantially equal periodic payments.
LAW
Section 72 sets forth rules for the taxation of amounts received under an annuity contract. section 72(q)(l) 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)(l) 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)(l) 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 §...