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Sunday, August 09, 2020



The income tax treatment of annuities is provided for under Code § 72. That section provides various rules, including extra income tax for some distributions to younger taxpayers and limits on deferral for entity  owners. The provisions can be difficult to interpret when the owner of the annuity is a grantor trust, and the annuitant and current beneficiary of the trust is not the grantor. A recent private letter ruling gives the IRS’ take on some of these issues. The following conclusions are based on the above scenario – a grantor trust is the owner of the annuity, and there is a current beneficiary that is not the grantor and whose life is the measuring life for the annuity.

  1. Code § 72(q) 10% additional tax on early distributions. This provision imposes a 10% addition to tax if a distribution from the annuity is made on or after the taxpayer attains age 59 ½ , but with exceptions for a disabled taxpayer, or if the distribution is part of a series of substantially equal periodic payments made for the life of the taxpayer or the taxpayer and his or her designated beneficiary. The PLR provides that the grantor, since the grantor is treated as owner of the trust under the grantor trust rules, is the “taxpayer” for purposes of the foregoing age, disability, and equal periodic payment exceptions to the 10% addition to tax rules under Code § 72(q).
  2. Code § 72(q)(2)(B) exception to 10% additional tax for death. This provision provides an exception to the 10% additional tax if the distribution is made on or after the death of the “holder” or, when the “holder” is not an individual, the death of the primary annuitant. The PLR provides that the “holder” is the grantor trust. Since it is not an individual, this exception applies to distributions after the death of the primary annuitant. That primary annuitant is the individual beneficiary (not the grantor), so distributions after the death of that beneficiary are not subject to the 10% addition to tax.
  3. Code § 72(u)(1) nondeferral to trust owners. This provision denies tax deferral for an annuity contract that is not owned by a natural person, although it does allow for a trust or other entity to hold the annuity as an agent for a natural person without running afoul of the loss of deferral. The PLR concludes that this provision does not apply where the grantor is a natural person. The reasoning is somewhat strained, but taxpayer friendly. It reads the exception to the rule to apply to a trust for a natural person (without regard to the “as an agent” language since that language only applies to entities other than a trust). Since the grantor is treated as owning the trust assets, it is treated as the owner of the contract. The grantor trust is holding the contract (as holder) for the grantor, who is a natural person. Thus, income tax deferral is allowed. The PLR notes that Code § 72(u) was adopted to encourage employers to offer benefits to employees under qualified plans (by stripping corporate nonqualified annuity plans of income tax deferral). So for private trust arrangements not in the employment context, there is no policy reason to deny deferral.

PLR 202031008, July 31, 2020

Sunday, July 19, 2020

Applicable Federal Rates - August 2020

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here.

Sunday, July 05, 2020


The FBAR rules require the filing of a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR) to report for accounts of U.S. persons aggregating $10,000 or more. For a non-willful failure to disclose, the maximum penalty imposed is $10,000.

Since one FBAR is used to report multiple accounts, a basic question is whether the non-willful failure to report several accounts gives rise to only one $10,000 penalty (based on one return), or $10,000 multiplied by the number of unreported accounts. This can make a big difference for taxpayers with multiple unreported accounts. This was especially important to the taxpayer in a recent case, where the number of unreported accounts ranged from 41 to 51 for 4 different tax years. If the penalty is calculated on a per return basis, then the penalty for the taxpayer is $40,000. On a per account basis, the penalty is $1,770,000. Luckily for the taxpayer, the District Court held that the penalty is imposed only per return, not per account.

In U.S. v. Boyd, 123 AFTR 2d 2019-1651 (C.D. Cal. 4/23/19), a different District Court previously held that the penalty is imposed on a per account basis. Here, the court rejected Boyd as precedent, largely because no rationale was stated for the court's conclusion, and thus the current court could not determine why its contrary analysis was incorrect. Instead, the court here noted that while the statutory language for the willful failure to file penalty specifically relates to accounts, the non-willful failure penalty language does not. Reasoning that if Congress wanted to impose the non-willful failure penalty based on the number of accounts, it showed it knew how to do so by doing so in the willful failure statutory language. Thus, by not using that language for non-willful failures, Congress did not intend to compute the penalty for non-willful failures based on the number of accounts.

Both Boyd and this case are only District Court cases, which limits their precedential authority. That, along with such courts being in different Circuit Courts of Appeal, means there is substantial uncertainty on how this issue will eventually play out and that there will likely be more cases to come.

U.S. v. Bittner, 126 AFTR 2d 2020-XXXX (DC TAX 6/29/20)