rr-18-17.pdf

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Section 3405.-- Special Rules for Pensions, Annuities, and Certain Other Deferred
Income
(Also, § 408)

Rev. Rul. 2018-17 Withholding and Reporting With Respect to Payments From IRAs to
State Unclaimed Property Funds

ISSUES

(1) Under the facts presented, is the payment by Trustee Y of Individual C’s interest
in IRA O to the State J unclaimed property fund, as required by State J law, subject to
federal income tax withholding under § 3405 of the Internal Revenue Code?
(2) Is the payment by Trustee Y subject to reporting under § 408(i)?

FACTS

Individual C has an interest in IRA O, a traditional IRA trusteed by Trustee Y.
Individual C, a U.S. person under § 7701(a)(30)(A) with a calendar year taxable year,
has not made a withholding election with respect to her interest in IRA O. State J law
requires Trustee Y to pay Individual C’s interest in IRA O to the State J unclaimed
property fund under which a claim for property may be made by the owner.
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In 2018,
Trustee Y pays Individual C’s interest in IRA O, which has a value of $1,000, to the
State J unclaimed property fund.
For purposes of this revenue ruling, an “IRA” is an individual retirement plan under
§ 7701(a)(37) (that is, an individual retirement account as defined in § 408(a) or

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This revenue ruling does not address whether the payment to the State unclaimed
property fund otherwise complies with applicable law (for example, it does not address
compliance with any applicable search requirements under State law).

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individual retirement annuity as defined in § 408(b)), and a “traditional IRA” is an IRA
that is not a Roth IRA under § 408A, a simplified employee pension under § 408(k), a
SIMPLE IRA under § 408(p), or a deemed IRA under § 408(q).
LAW AND ANALYSIS

(1) Withholding

Section 3405 provides federal income tax withholding rules with respect to
designated distributions. Under § 3405(e)(1)(A), a designated distribution means,
except as provided in § 3405(e)(1)(B), any distribution or payment from or under an
employer deferred compensation plan, an IRA, or a commercial annuity. As relevant
here, under § 3405(e)(1)(B)(ii), a designated distribution does not include the portion of
a distribution or payment that it is reasonable to believe is not includible in gross
income.
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For this purpose, the flush language under § 3405(e)(1)(B) provides that any
distribution or payment from or under an IRA (other than a Roth IRA as defined in
§ 408A) is treated as includible in gross income.
Section 3405 requires federal income tax to be withheld from two types of
designated distributions from IRAs, each with its own withholding rules: periodic
payments under § 3405(a), and nonperiodic distributions under § 3405(b). Under
§ 3405(e)(3), a nonperiodic distribution is a designated distribution that is not an annuity
or similar periodic payment. In the case of a nonperiodic distribution under

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Under § 3405(e)(1)(B)(iii), a designated distribution also does not include a payment
that is subject to withholding under the withholding rules applicable to payments to
nonresident aliens and foreign corporations. See § 1441 (Withholding of Tax on
Nonresident Aliens), § 1442 (Withholding of Tax on Foreign Corporations), and
§ 1.1441-4(b)(1)(ii) (Exemptions from Withholding for Certain Effectively Connected
Income and Other Amounts).

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§ 3405(e)(3), § 3405(b)(1) provides that the payor shall withhold from such distribution
an amount equal to 10 percent of the distribution. Section 3405(b)(2) provides that an
individual may elect not to have § 3405(b)(1) withholding apply with respect to any
nonperiodic distribution.
Section 35.3405-1T provides rules regarding § 3405, including general rules on
withholding requirements and specific rules addressing withholding on periodic and
nonperiodic distributions, notice and election procedures, and reporting and
recordkeeping. Section 35.3405-1 provides rules regarding the medium through which
notices required under § 3405 may be provided.
The payment of Individual C’s interest in IRA O, a traditional IRA, to the State J
unclaimed property fund, as required by State J law, is a payment from an IRA that is
treated as includible in gross income (pursuant to the flush language of § 3405(e)(1)(B))
for purposes of § 3405(e)(1)(B)(ii). Thus, the payment is a designated distribution for
purposes of § 3405. The payment from IRA O is not an annuity or similar periodic
payment under § 3405(e)(2). Thus, it is a nonperiodic distribution as defined in
§ 3405(e)(3). Because Individual C has not made a withholding election with respect to
the payment, a 10 percent withholding rate applies to the payment pursuant to
§ 3405(b)(1), and Trustee Y must withhold federal income tax of $100 (10% of
Individual C’s $1,000 interest in IRA O).
(2) Reporting

Section 408(i) provides that the trustee of an individual retirement account and the
issuer of an endowment contract described in § 408(b) or an individual retirement
annuity must make such reports regarding such account, contract, or annuity to the

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Secretary and to the individuals for whom the account, contract, or annuity is, or is to
be, maintained with respect to contributions (and the years to which they relate),
distributions aggregating $10 or more in any calendar year, and such other matters as
the Secretary may require.
Section 1.408-7(a) provides that the trustee of an individual retirement account or the
issuer of an individual retirement annuity who makes a distribution during any calendar
year shall make a report of the distribution for such year. Form 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., is used to satisfy this reporting obligation.
Pursuant to § 408(i), Trustee Y must report the $1,000 distribution from IRA O ($900
of which is paid to the State J unclaimed property fund and $100 of which is remitted as
federal income tax withholding) on a 2018 Form 1099-R identifying Individual C as the
recipient.
HOLDINGS

(1) Under the facts presented, the payment by Trustee Y of Individual C’s interest in
IRA O to the State J unclaimed property fund, as required by State J law, is subject to
federal income tax withholding under § 3405.
(2) The payment by Trustee Y is subject to reporting under § 408(i).
TRANSITION RELIEF

A person will not be treated as failing to comply with the withholding and reporting
requirements described in this revenue ruling with respect to payments made before the
earlier of January 1, 2019, or the date it becomes reasonably practicable for the person
to comply with those requirements.

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DRAFTING INFORMATION

The principal author of this revenue ruling is Cynthia Van Bogaert of the Office of
Associate Chief Counsel (Tax Exempt and Government Entities). Ms. Van Bogaert may
be reached at (202) 317-4102 (not a toll-free number).