Prior IRA rollover prevents waiver for later distributions

Plain-English summary

A taxpayer moved money from one IRA into another account that she believed permitted self-directed real-estate investments. The new custodian did not offer self-directed IRAs and instead recorded checks used for real estate and another investment as distributions. Although the taxpayer later liquidated the investments and redeposited the money, the receiving IRA had already participated in an IRA-to-IRA rollover less than one year earlier. The IRS explained that it may waive the 60-day deadline but cannot waive the one-rollover-per-year limit in IRC § 408(d)(3)(B). It denied relief, treated the distributions as taxable income, and treated the later IRA deposits as excess contributions under § 4973.

Ruling snapshot

• Question: Could the IRS waive the 60-day rollover deadline for distributions used to buy alternative investments outside the IRA?
• Outcome: Denied because another IRA-to-IRA rollover involving the account had occurred within the preceding year.
• Key authorities: IRC §§ 408(d)(3), 4973; Rev. Proc. 2003-16.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY 201636050

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND JUN 08 2016

GOVERNMENT ENTITIES
DIVISION

Uniform Issue List: 408.03-00 SE:T:EP:RA:T1

Legend
Taxpayer A =

IRA B =

IRA C =

Financial Institution D

Financial Institution E

Amount 1 =
Amount 2 =
Amount 3 =
Amount 4 =
Amount 5 =

Amount 6 =

Dear

This is in response to your request dated September 1, 2015, as supplemented by
correspondence received on May 9, 2016, in which you request, through your
authorized representative, a waiver of the 60-day rollover requirement contained in
section 408(d)(3) of the Internal Revenue Code (the “Code”).


2

201636050

The following facts and representations have been submitted under penalty of
perjury in support of the ruling requested.

Taxpayer A received distributions totaling Amount 5 from IRA C, which was
maintained by Financial Institution E. Taxpayer A asserts that the failure to
accomplish a rollover within the 60-day period prescribed by section 408(d)(3)(A)
of the Code was due to her belief that the purchases made with the distributions
were either made within the IRA or rolled over into an IRA within 60 days.

Taxpayer A maintained two IRAs, IRA B with Financial Institution D, and IRA C
with Financial Institution E. Taxpayer A wanted to use amounts in IRA B to fund
IRA C, which she believed was a self-directed IRA that would allow her to invest in
real estate and other alternative investments. Financial Institution E, however, did
not offer self-directed IRAs.

On June 30, 2009, Taxpayer A withdrew Amount 6 from IRA B which she rolled
over into IRA C. The distribution of Amount 6 from IRA B was evidenced by
financial statements from Financial Institution D. The rollover contribution of
Amount 6 was evidenced by financial statements from Financial Institution E as
well as the rollover contribution form submitted by Taxpayer A to Financial
Institution E.

After the rollover of Amount 6, the following distributions from IRA C were made:
Amount 1, on July 6, 2009; Amount 2 on August 17, 2009; Amount 3 on August
20, 2009; and Amount 4 on August 8, 2009. Amounts 1, 2, and 3 were distributed
from IRA C in the form of checks payable to a title company for the purchase of
real estate, which Taxpayer A titled in the name of her IRA. Amount 4 was
distributed from IRA C in the form of a check payable to a limited liability company.
The distributions were recorded as such by Financial Institution E.

Taxpayer A received a Form 1099-R for the year that reported Amount 5, an
amount equal to the sum of Amounts 1, 2, 3 and 4, as a taxable distribution from
IRA C. When Taxpayer A investigated further, she learned that Financial
Institution E did not offer a self-directed IRA. Subsequently she liquidated the
alternative investments and deposited Amount 5 back into an IRA account.
Taxpayer A submitted a letter from Financial Institution E, which was dated August
30, 2011, in which Financial Institution E acknowledged Taxpayer A’s intention
that the distributions totaling Amount 5 not be taxable but rather tax free rollovers
that should have generated a Form 5498 rather than a Form 1099-R.

Based on the above facts and representations, Taxpayer A requests a waiver of
the 60-day rollover requirement with respect to the distributions from IRA C
totaling Amount 5.


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Section 408(a) of the Code defines an IRA to mean a trust created or organized in
the United States, and requires that the trustee be a bank or an approved non-
bank trustee.

Section 408(d)(1) of the Code provides that, except as otherwise provided in
section 408(d), any amount paid or distributed out of an IRA shall be included in
gross income by the payee or distributee, as the case may be, in the manner
provided under section 72.

Section 408(d)(3) of the Code provides the rules applicable to IRA rollovers.

Section 408(d)(3)(A) of the Code provides that section 408(d)(1) does not apply to
any amount paid or distributed out of an IRA to the individual for whose benefit the
IRA is maintained if:

(i) the entire amount received (including money or any other property) is
paid into an IRA for the benefit of such individual not later than the 60th day after
the day on which the individual receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is
paid into an eligible retirement plan (other than an IRA) for the benefit of such
individual not later than the 60th day after the date on which the payment or
distribution is received, except that the maximum amount which may be paid into
such plan may not exceed the portion of the amount received which is includible in
gross income (determined without regard to section 408(d)(3)).

Section 408(d)(3)(B) of the Code provides that section 408(d)(3) does not apply to
any amount described in section 408(d)(3)(A)(i) received by an individual from an
IRA if at any time during the 1-year period ending on the day of such receipt such
individual received any other amount described in section 408(d)(3)(A)(i) from an
IRA which was not includible in gross income because of the application of section
408(d)(3).

Section 408(d)(3)(D) of the Code provides a similar 60-day rollover period for
partial rollovers.

Section 408(d)(3)(E) of the Code provides that the rollover provisions of section
408(d) do not apply to any amount required to be distributed under section
408(a)(6).

Section 408(d)(3)(I) of the Code provides that the Secretary of the Treasury may
waive the 60-day requirement under sections 408(d)(3)(A) and 408(d)(3)(D) 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.


4 201636050

Rev. Proc. 2003-16, 2003-4 I.R.B. 359, provides that the Service will issue a ruling
waiving the 60-day rollover requirement in cases 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 taxpayer. In
determining whether to grant a waiver of the 60-day rollover requirement pursuant
to section 408(d)(3)(I) of the Code, the Service will consider all relevant facts and
circumstances, including: (1) errors committed by a financial institution; (2) inability
to complete a rollover due to death, disability, hospitalization, incarceration,
restrictions imposed by a foreign country or postal error; (3) the use of the amount
distributed (for example, in the case of payment by check, whether the check was
cashed); and (4) the time elapsed since the distribution occurred.

As indicated above, section 408(d)(3)(B) of the Code imposes a 1-year limitation
on IRA-to-IRA rollovers. Since IRA C was involved in a rollover, on June 30, 2009,
no rollovers could have been made from IRA C for a year.

Taxpayer A argues that she never intended to take a distribution and that if the
custodian of IRA C purchased the alternative investments on behalf of IRA C, i.e.,
if the distributions totaling Amount 5 had not been made, Amount 5 would not be
taxable. However, these are not the facts in this case: the distributions totaling
Amount 5 were in fact made, and they could not be rolled over to another IRA
without violating the one-year limitation, which the Service is not authorized to
waive. Alternatively, Taxpayer A argues that amounts 1, 2, 3 and 4 were not
distributed out of her IRA because the checks for these amounts were made
payable to the title company and limited liability company. In fact, Financial
Institution E did not offer self-directed IRAs and the distributions were made to
purchase the alternative investments. If there were no distributions, Taxpayer A
would not be seeking a waiver.

Accordingly, the Service hereby declines to waive the 60-day rollover requirement
with respect to the distributions totaling Amount 5 from IRA C and thus Amount 5
cannot be rolled over into an IRA. Amount 5 must be included in Taxpayer A’s
gross income for the taxable year, and the contributions totaling Amount 5
into an IRA or IRAs are considered excess contributions under section 4973 of the
Code.

This ruling does not authorize the rollover of amounts that are required to be
distributed by section 408(a)(6) of the Code.

No opinion is expressed as to the tax treatment of the transaction described herein
under the provisions of any other section of either the Code or regulations which
may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

201636050

Pursuant to a power of attorney on file with this office, a copy of this letter ruling is
being sent to your authorized representative.

If you wish to inquire about this ruling, please contact
at . Please address all correspondence to SE:T:EP:RA:T1.

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Notice of Intention to Disclose
Deleted copy of this letter

Cc: