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Averaging can't be used when participant died before age 59 1/2.

Joseph Cebula, a participant in the retirement plan of his employer, died at age 45. The sole beneficiary of his interest in the plan was his widow, Mary, who elected to receive Joseph's entire $175,000 balance in a lump-sum distribution. She reported this amount on her 1989 return and used the five-year averaging method to calculate the tax due.

The IRS claimed Mary was not entitled to use the averaging method and asserted a $15,000 tax deficiency.

As long as the IRS requirements have been met, a recipient of a lump-sum distribution from a qualified plan may elect to have.the distribution taxed under the five-year average rules, which generally result in payment of less tax. Code section 402(d)(4)(b)(i) says averaging is available only if the lump-sum distribution is received on or after the day the "employee has attained age 59 1/2."

Result: For the IRS. Under the statute's plain language employee must have reached age 59 1/2 for the averaging method to be available. Therefore, Mrs. Cebula must pay $15,000 of tax.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1993
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