What happens in the event of divorce, when a participant is taking substantially equal payments from IRA? Spouse will get on-half of IRA, therefore he will need to reduce amount he is taking monthly. How does he avoid getting penalized 10% for altering pymt schedule?

You might take a look at Private Letter Ruling 200050046, which has an almost identical set of circumstances. In the ruling, the Service concluded that the split didn't cause a modification of the series of payments, thus no penalty was imposed.

Hope this is of some benefit to you.

There have been a number of private rulings recently on this issue. In addition to the one cited, check 200052039 and 200116056. As long as the transfer to the spouse meets the 408(d)(6) requirements, they've allowed payments to continue just on the reduced amount.

Of course, you're not supposed to use a private ruling as a precedent but if we didn't have them we'd have almost no information on what is considered a modification for Sec. 72(t) purposes.

I would strongly suggest you get your own private letter ruling, especially if the dollars are big enough. If you go for a PLR, the IRS will approve the method of computing the new distributions. Less chance for an error, IMO.