IRA Recapture Tax.

• Author: Laffie, Lesli S.

The Tax Court, in Robert CT. Arnold, 111 TC No. 12 (9/28/98), held that an additional individual retirement account (IRA) distribution received by a taxpayer less than five years after he began a series of substantially equal periodic payments was an impermissible modification that triggered application of the Sec. 72(t)(4) recapture tax on early withdrawals. Although the distribution was made after the taxpayer had received the fifth annual distribution under the series of payments, it was received within the five-year period beginning on the date of the first payment, triggering recapture.

The taxpayer had been a 50% shareholder and vice president of a chemical manufacturer until his retirement in 1987. In that year, the taxpayer sold his stock interest to a competitor who agreed to pay the purchase price over 11 years. In October 1993, the purchaser filed for bankruptcy and stopped making the installment payments.

The taxpayer had received annual IRA distributions of $44,000 in December 1989 and from January 1990-1993. In November 1993, after receiving five such annual distributions, the taxpayer...