A partner in my firm came to me yesterday with the following concern:

Owner employee turned age 70 1/2 in 2005. 1st distribution was made in March 2006. As he was preparing the 2006 distribution to be made by December 31, the owner employee informed him of a TEFRA 242(b) election that he signed back in 1982.

Question: If the owner puts back in the 2005 distribution that he took in March, could the 242(b) election be considered "not broken"? The owner is even of the mind to consider the distribution as a "prohibited transaction" between the plan and the corporation, which will be corrected before December 31, with the appropriate Form 5330 to be filed reporting the PT and paying the excise tax.

Any replies would be appreciated.

You should do some research on the doctrine of recission in the federal tax law.
Be careful of being too cute with the prohibited transaction idea. You might end up in a situation where your plan is subject to disqualification if your new characterization of the events means that you failed to follow the terms of the written plan document.

I agree with Harry O. Few years back we had one of these go into affect. Legal counsel at the time made it vary clear to the guy, any change in the payments would void the tefra language and regular min distribution rules would apply.

Is the person still working? If so does the Plan have an in-service distribution option? There are at least 2 PLRs where the IRS has said that an in-service distribution does not revoke a TEFRA election since that election just applies to benefits at retirement. If the guy is still working, and the Plan has an in-service provision that provides for partial withdrawals you might see if this would work.