Academic journal article Journal of Accountancy

Loan Refinancing Deemed a Taxable Distribution

Academic journal article Journal of Accountancy

Loan Refinancing Deemed a Taxable Distribution

Article excerpt

The Tax Court found that the amount by which a taxpayer's refinancing of a loan from his qualified retirement plan exceeded statutory limits was a deemed distribution subject to the 10% additional tax.

Under section 72(p)(2), a loan from a qualified retirement plan to a participant is not treated as a taxable distribution under three conditions: (1) The principal amount of the loan, when added to the outstanding balance of any other loans from the same plan, does not exceed the lesser of (a) $50,000 or (b) the greater of one-half of the present value of the nonforfeitable accrued benefit of the employee under the plan or $10,000. (2) The loan must be repaid within five years of its inception (unless used to acquire a home that is the participant's principal residence), and (3) the loan has substantially level amortization, with quarterly or more frequent payments over its term.

Vincent Marquez worked for New York City as an emergency medical technician. He participated in the New York City Employees' Retirement System, taking several loans from his account. In 2005, he refinanced his loans and signed an authorization document acknowledging that the refinancing would likely result in taxable income. Marquez was offered other options that would not result in income: an additional loan on the original terms or a new loan for a smaller amount.

The amount of the refinancing loan was $12,347. Marquez chose to repay the loan in the maximum number of payments allowed, 130 bimonthly payments. …

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