Ruling 91-9

Capital Gains Tax

This Ruling has been obsoleted by AN 94(2)

ISSUE:

If a distributee who has attained age 50 before January 1, 1986 elects the application of Pub. L. No. 99-514, §1122(h)(3) to a lump sum distribution, is the distributee subject to the capital gains tax that is imposed by Conn. Gen. Stat. §12-506(a)(2)?

FACTS:

1. A resident, as defined in Conn. Gen. Stat. §12-505(a), is a distributee of a qualified retirement plan.
2. The distributee attained age 50 before January 1, 1986.
3. The distributee elected the application of Pub. L. No. 99-514, 100 Stat. 2085, 2470, 1122(h)(3) to a lump sum distribution from such plan.

DISCUSSION:

"In the case of a lump sum distribution to which [Pub. L. No. 99-514, §1122(h)(3)] applies, (i) the existing capital gains provisions shall continue to apply ...." Pub. L. No. 99-514, §1122(h)(3)(A)(i).

"For purposes of [Pub. L. No. 99-514, §1122(h)(3) and (4)], the term 'existing capital gains provisions' means the provisions of paragraph (2) of section 402(a) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) and paragraph (2) of section 403(a) of such Code (as so in effect)." Pub. L. No. 99-514, §1122(h)(6), 100 Stat. 2085, 2472.

On the day before the date of the enactment of Pub. L. No. 99-514, 26 U.S.C. §402(a)(2) provided that a certain portion of the total taxable amount of a lump sum distribution "shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months ...."

On the day before the date of the enactment of Pub. L. No. 99-514, 26 U.S.C. §403(a)(2) provided that a certain portion of the total taxable amount of a lump sum distribution "shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months ...."

"Gains from the sale or exchange of capital assets", as defined in Conn. Gen. Stat. §12-505(a), "means (1) net gain as determined for federal income tax purposes, after due allowance for losses and holding periods, .... from (A) sales or exchanges of capital assets or assets treated as capital assets, ... or (B) from transactions or events taxable to the taxpayer as such sales or exchanges ...."

Because the tax imposed by Conn. Gen. Stat. §12-506(a)(2) applies to "net gain as determined for federal income tax purposes, after due allowance for losses and holding periods, ... (B) from transactions or events taxable to the taxpayer as [sales or exchanges of capital assets or assets treated as capital assets]", a distributee who has attained age 50 before January 1, 1986 and who elects the application of Pub. L. No. 99-514, §1122(h)(3) to a lump sum distribution would be subject to the tax.

The fact that the portion of the lump sum distribution to which the existing capital gains provisions, as defined in Pub. L. No. 99-514, §1122(h)(6), continue to apply (by reason of Pub. L. No. 99-514, §1122(h)(3)) is not reported on Schedule D to Form 1040 is without legal significance. See Yaeger v. Dubno, 188 Conn. 206, 211 n.5 (1982).

RULING:

A distributee who has attained age 50 before January 1, 1986 and who elects the application of Pub. L. No. 99-514, §1122(h)(3) to a lump sum distribution is subject to the capital gains tax that is imposed by Conn. Gen. Stat. §12-506(a)(2).

LEGAL DIVISION

March 29, 1991