New simplified rules: New distribution rules for qualified retirement plans and IRAs.

The March/April 2001 issue of California CPA, Page 32, summarized the 2001 proposed regulations that provide simplified rules for required minimum distributions from qualified retirement plans and IRAs: "The regs are proposed to be applicable for determining RMDs for calendar years beginning after 2001. For determining RMDs for 2001, taxpayers may rely on these proposals or on regs. proposed in 1987 ... ."

IRS Ann. 2001-18, IRB No. 2001-10, Mar. 5, 2001, Page 791, clarifies these effective dates as follows: "For this purpose, distributions for calendar year 2001 do not include a distribution that is required to be made by April 1, 2001, for calendar year 2000, such as for an IRA owner or retired qualified plan participant who attains age 70.5 in 2000. To determine the amount of such a distribution ... , taxpayers may rely on the 1987 Proposed Regulations."

Thus, IRS Notice 1269, supplementing IRS Publication 575, Pensions and Annuity Income, states: "If your required beginning date is April 1, 2001 (either because you attained age 70.5 or retired in 2000), and you are taking your minimum required distribution for 2000 by April 1, 2001, do not use the new rules for figuring the distribution for 2000. Instead, use the old rules in Publication 575. Use the new rules for figuring the required distribution for 2001 that must be made by the end of 2001."

Similarly, Notice 1270, supplementing Publication 590, Individual Retirement Arrangements (IRAs), states: "If you attained age 70.5 in 2000 and are taking your minimum required distribution for 2000 by April 1, 2001, do not use the new rules for figuring the distribution for 2000. Instead, use the old rules in Publication 590. Use the new rules for figuring the required distribution for 2001 that must be made by the end of 2001."

The texts of notices 1269 and 1270 are contained in IRS Ann. 2001-23, IRB No. 2001-10, Page 791.

The preamble to the 2001 proposed regs. points out: "For distributions for the 2001 calendar year, IRA owners are permitted, but not required, to follow these proposed regulations in operation, notwithstanding the terms of the IRA documents. IRA owners may therefore rely on these proposed regulations for distributions for the 2001 calendar year. However, IRA sponsors should not amend their IRA documents to conform their IRAs to the changes in these proposed regulations before the publication of final regulations ...."

In contrast, for qualified plans, the preamble states: " ... for distributions for the 2001 and subsequent calendar years beginning before the effective date of final regulations, plan sponsors are permitted, but not required, to follow these proposed regulations, in the operation of their plans by adopting the model amendment set forth [in the preamble]."

However, as described above, Notice 1269 allows the new rules to be used to determine a post-April 1, 2001 RMD from a qualified plan--even if the plan has not been amended to reflect those rules. Therefore, an RMD from an unamended plan usually will exceed the RMD computed under the new rules.

As reported in the Mar. 8, 2001 RIA Weekly Alert, Page 126: "This caused RIA to ask IRS whether such an excess distribution could be rolled over to an IRA. An IRS spokesperson advised that the reg writers had not initially considered this issue, but now agree that distributions in excess of the RMD for 2001 as figured under the new rules are eligible rollover distributions.

"RIA observation: Thus, a qualified plan participant who receives distributions that exceed his RMD for 2001 as figured under the new rules may avoid tax on the excess amount by rolling it over into an IRA within 60 days of the distribution. Amounts rolled over would have to be figured into RMD calculations for 2002 and later years.

"RIA observation: Eligible rollover distributions that are not transferred directly to another qualified plan or IRA are subject to mandatory 20 [percent] withholding. However, plans that use the old RMD rules for 2001 should not have to withhold on amounts that participants are eligible to roll over, because, as to the plans, the distributions are RMDs under the plan rules in effect for 2001, and, under those rules are not rollover eligible."

Stuart R. Josephs, CPA, has a San Diego based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax problems. Jose phs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation

RELATED ARTICLE: PRACTICE ALERT New Deemed Sale and Repurchase Election

The Federal Tax articles in the December 2000 and March/April 2001 issues of California CPA, Pages 27 and 32, respectively, discussed the reduced capital gain tax rates available for sales and exchanges of certain capital assets after 2000. Except for taxpayers in the 15-percent bracket, the top rate for gains on assets purchased after 2000 and held for more than five years will be 18 percent, instead of 20 percent.

These prior articles pointed out that a taxpayer holding a capital asset or an asset used in the taxpayer's trade or business on Jan. 1, 2001, may irrevocably elect to treat the asset as sold for its fair market value and re-acquired for the same amount. If this election is made, any deemed gain must be recognized but any deemed loss is disallowed.

The election is made by reporting deemed gains and zero for deemed losses on a return that includes the deemed sale date. For example, a calendar-year individual taxpayer makes this election on his or her 2001 return.

Also, if a return is timely filed without making the election for any asset, the election still can be made in an amended return filed within six months of the return's original due date, excluding extensions. For calendar-year taxpayers, this election could be made as late as Oct. 15, 2002.

Procedures concerning this new election were suggested in the Fall 2001 issue of IMPACT Page 8, published by CAMICO Services, Inc, the educational arm of CAMICO Mutual Insurance Company:

"The Sec. 311(e) election presents a potential malpractice claim. If you do not properly inform your clients regarding the availability of the election and a client later sells an asset which could have potentially qualified for the reduced 18-percent rate, your firm could possibly be liable for the extra tax your client incurs when the asset is sold later. Any damages would, of course, be offset by the amount of the capital gain the client did not incur from the Sec. 311(e) election. However, if the capital asset's value has significantly increased after Dec. 31, 2000, the damages could be significant. Also consider that the asset could appreciate substantially over a long period of time.

"To eliminate this potential hazard, it will be important for you to fully inform your individual clients in writing regarding (i) the availability of the Sec. 311(e) election; (ii) and the benefits and detriments of the election. The written document should specifically request the client's indication regarding whether or not they would like to make the Sec. 311(e) election.

"The client letter should ideally be sent as a separate document attached to the tax organizer. Additionally, because it is impossible for you to know all the capital assets which your clients own, the letter should be sent to all your individual clients, even if you do not think the Sec. 311(e) election will apply to some clients. Alternatively, the client letter can be sent on a case-by-case basis but only if you have intimate knowledge regarding all your clients' capital assets. Finally, in your personal interview with the client, you should verify that the client has indicated his/her choice regarding the Sec. 311(e) election. If the client has not indicated a choice, an inquiry regarding the Sec. 311(e) election should be posed to the client, a response obtained from the client, and the response noted in the organizer."

As indicated in the December 2000 Federal Tax article, the reduced capital gain tax rates and the deemed sale and repurchase election (under Sec. 311(e) of the 1997 Taxpayer Relief Act) apply to noncorporate taxpayers. Therefore, the client letter described above also should be sent to all other noncorporate clients such as trusts, estates, partnerships, etc. (Under IRC Sec. 703(b), any election affecting the computation of taxable income derived from a partnership must be made by the partnership with three non-germane exceptions.) -- Stuart R. Josephs, CPA