Tax Court Allows Rollover Contribution Past Deadline

In a recent Memorandum opinion issued by the Tax Court, the Court held that the 60-day time limit for individual retirement account (“IRA”) rollovers was met for a distribution and subsequent recontribution of IRA funds despite the funds not being credited back to the IRA upon recontribution until 62 days after the initial distribution.1 The IRS contended that the 60-day time limit, discussed below, had been missed but the Court found otherwise on multiple grounds.

Facts

In 2014, Nancy Burack (“Burack”) had an IRA that was held by Capital Guardian, LLC (“Capital”) and Pershing, LLC (“Pershing”). The account was managed Capital; Pershing was the custodian of the account. The relationship between Capital and Pershing is not entirely clear, and the Court stated as much in its opinion.

In 2014, Burack relocated from New York City to Philadelphia. On June 25, 2014, Burack took a distribution of $524,981.89 from her IRA to purchase a new home in Philadelphia while she waited for the sale of her New York City home to close. She intended that the sale of her New York City home would close with in the 60-day time period for IRA rollovers and thus she could roll over the distribution back into her IRA within the 60-day period.2

On August 21, 2014, 57 days after the distribution, the sale of Burack’s New York City home closed and Burack received a cashier’s check for $524,981 made out to “PERSHING FBO NANCY J. BURACK”.

Burack’s financial advisor initially advised her that she could deposit the check into her IRA with Pershing at the Bank of New York office on Wall Street.3 However, Capital later assured Burack that she could deposit the check into her IRA by overnighting the check to their office in North Carolina. Accordingly, Burack overnighted the check to Capital that same day, and it arrived at Capital’s office on August 22, 2014, 58 days after Burack received the distribution from her IRA.

On August 26, 2014, 4 days after Capital received the check and 62 days after Burack received the distribution from her IRA, the check was deposited into Burack’s IRA at Pershing. It is unclear from the record what exactly happened in the 4 days between Capital’s receipt of the check on August 22, 2014 and its deposit with Pershing on August 26, 2014. August 22, 2014 was a Friday, although even if delayed over the weekend, the deposit should have occurred with Pershing on Monday, August 25, 2014, still 1 day over the 60-day time period allotted for the deposit to be made.

Throughout the process, Burack had no communications with Pershing and only communicated with Capital. All of Burack’s account statements for the IRA for the relevant periods were generated by and provided to Burack by Capital. In 2017, the IRS issued a notice of deficiency to Burack asserting that the 60-day time period for repayment of the IRA distribution had been missed, and thus the $524,980 distribution made in 2014 was taxable and should be included in Burack’s 2014 gross income. Burack timely filed her petition with the Tax Court challenging the IRS’ assertion.

Analysis

Section 408 of the Internal Revenue Code governs the tax treatment of distributions from an IRA.4 In general, distributions made from an IRA are to be included in the recipient’s gross income in the year of the distribution.5 There are some exceptions to this rule, one of which is the rollover exception provided by §408(d)(3)(A)(i).6 In order for a contribution to be considered a “rollover contribution” which qualifies for the exception to gross income inclusion, the distribution received must be transferred into an IRA (or individual retirement annuity) for the benefit of the recipient not later than the 60th day after the day on which he receives the payment or distribution.7

The statute does provide a hardship exception where the Secretary of the Treasury may waive the 60-day time limit for recontribution “Where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.”8 The IRS has issued guidance regarding eligibility for this hardship waiver and provided an automatic hardship waiver if the following two requirements are met: 1) the funds are deposited into an eligible retirement plan within 1 year from the beginning of the 60-day rollover period; and 2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover.9 An application for the hardship waiver may be made to the IRS for fact patterns which are not eligible for the automatic hardship waiver.10

Burack put forth two theories as to why her distribution and recontribution in 2014 was a qualified rollover and thus not taxable to her in 2014. First, she alleged that the rollover was not recorded timely because of bookkeeping error, citing a prior case with similar facts, Wood v. Comm’r, 93 T.C. 114 (1989). In Wood, the taxpayer transferred stock to Merrill Lynch with instructions that the shares be deposited in his IRA account. However, the records in the case reflect that Merrill Lynch first deposited the shares into a nonqualified account and subsequently moved the shares into taxpayer’s IRA after the expiration of the 60-day rollover window. The Court looked at the substance of the transaction and the relationship between the taxpayer and Merrill Lynch while explaining that where book entries and records conflict with facts, the facts control.11 The Court concluded that the transaction was entitled to rollover treatment since Merrill Lynch had accepted the stock for deposit into the IRA account and held the stock subject to the IRA trust instrument.12

While the facts of present case are not identical, the Court concluded that Wood was still applicable. The substance of the transaction and the relationship between Burack and Capital and Pershing were enough to conclude that the late deposit into Burack’s IRA was attributable to a bookkeeping error. Burack never communicated with Pershing. All of her communication was with Capital; all of her account statements were generated by Capital; Capital assured her that she could complete the rollover by overnighting the check to Capital’s North Carolina office; and it was undisputed that the check was received by Capital 58 days after the distribution to Burack, 2 days before the deadline. The IRS argued that Pershing, as custodian, was the appropriate party to send the check for deposit in Burack’s IRA. However, due to the relationship between Burack, Capital, and Pershing, as well as the fact that Burack had an account with Capital and Pershing that had the same account number, the Court concluded that Capital was an appropriate party for Burack to send the check for deposit in her IRA. Since the check was received by Capital within the 60-day rollover period, the Court concluded that the rollover was valid and the 2014 distribution to Burack was not taxable.

While the Court could have stopped there and not discussed the hardship exception, the Court went on to discuss such exception ultimately concluding that Burack was eligible for the automatic hardship waiver pursuant to Revenue Procedure 2003-16. The funds were deposited in her IRA within the 1-year timeframe and if Capital had acted as instructed and deposited Burack’s check when received, the 60-day deadline would not have missed. Thus, the two requirements for the automatic hardship waiver under Revenue Procedure 2003-16 were met.

Conclusion

This case presents an interesting fact pattern whereby the taxpayer seems to have done everything correctly and as instructed by her advisors in order to meet the eligibility requirements for the rollover contribution treatment, and the Court reached the correct and equitable conclusion. The IRS took a rather harsh position in disallowing the rollover contribution treatment given the facts at hand.

A distribution from an IRA followed by an eligible rollover contribution within the allotted 60-day window can be a great way to temporarily access funds from an IRA without incurring an interest or going through the hoops of a temporary or bridge loan. Here, the taxpayer used the funds to close on a new home knowing (or hopefully knowing) that she would close on the sale of her previous home in time to get the funds back into the IRA and avoid having the distribution of the funds treated as a taxable distribution. There are numerous traps in this strategy so taxpayers should be wary and seek the advice of counsel prior to taking a distribution which the taxpayer plans to recontribute as an eligible rollover contribution.

Footnotes

  1. Burack v. Comm’r, TC Memo 2019-83.
  2. See §408(d)(3)(A)(i).
  3. Whether the financial advisor who gave Burack such advice was someone at Capital or a separate financial advisor not associated with Capital is not clear from the opinion.
  4. All references to a Section or § are to a Section of the Internal Revenue Code unless otherwise noted.
  5. §408(a)(1).
  6. Other major exceptions to general rule under §408(a) which are not discussed in this Article are for distributions from Roth retirement accounts, transfers of retirement accounts as part of a divorce (see §408((d)(6)), and distributions to charity, subject to some limitations (see §408((d)(8)).
  7. §408(d)(3)(A)(i); While not the purposes of the Article, partial rollovers are permitted (§408(d)(3)(D)), and there are numerous exceptions to what qualifies to be a “rollover contribution” including but not limited to the one rollover per year rule(§408(d)(3)(B)), distributions from an inherited IRA do not qualify (§408(d)(3)(C)), and required distributions do not qualify(§408(d)(3)(E)).
  8. §408(d)(3)(I).
  9. Rev. Proc. 2003-16.
  10. Id.
  11. Wood at 121.
  12. Id.