Academic journal article Journal of Accountancy

Doctor's Change in Form of Practice Wasn't Separation from Service for Pension Payout Purposes

Academic journal article Journal of Accountancy

Doctor's Change in Form of Practice Wasn't Separation from Service for Pension Payout Purposes

Article excerpt

Burton, a physician, incorporated his practice in 1977 as a professional association (PA). The PA set up both a pension plan and a profitsharing plan in 1978.

Burton probably formed a PA because of the greater retirement plan benefits corporations could provide at that time. However, the rules were changed as of 1984 to establish parity in contributions and benefits between corporate and noncorporate plans.

In 1984, Burton liquidated the PA while continuing to practice at the same location as a sole proprietor. Burton terminated both retirement plans and in 1985 and 1986 received distributions of about $300,000. He reported them as lump-sum distributions (LSDs) and used the 10-year averaging method to calculate the tax owed.

Under IRC section 402(d), retirement plan payouts qualifying as LSDs are eligible for favorable tax treatment. Under current law, LSD recipients can elect 5-year averaging when they reach 59 1/2 (or if they turned 50 before 1986). Certain individuals who were 50 before 1986 also can elect 10-year averaging under transitional rules.

To qualify as an LSD under section 402(d), a payout must be received as a result of separation from service or death or after the payee becomes disabled or reaches age 59 1/2. …

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