Waives 60-day rollover deadline after faulty NUA advice

Plain-English summary

A retired employee received employer stock from a 401(k) plan after advisers recommended using the net unrealized appreciation tax exclusion instead of rolling the stock into an IRA. The taxpayer later learned that a deemed plan-loan distribution made NUA treatment unavailable and caused the stock distribution to be fully taxable. Some shares had been sold, but the taxpayer retained the remaining shares in a non-IRA account and requested relief for that portion. The IRS found that incorrect information from the financial advisers caused the missed 60-day deadline. It waived the deadline for the remaining shares, provided all other rollover requirements were met.

Ruling snapshot

• Question: Could the taxpayer roll remaining employer shares into an IRA after advisers' incorrect NUA advice caused the 60-day deadline to pass?
• Outcome: Approved for the retained shares, subject to all other rollover requirements.
• Key authorities: IRC §§ 402(c)(3), 402(c)(6), 402(e)(4); Rev. Proc. 2003-16

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

APR 04 2018

Uniform Issue List: 402.00-00

Legend

Taxpayer A =

Plan B =

Account C =
IRA D =

Company E =
Financial Advisor F =

Financial Advisor G =

Company H =

Financial Institution I =

Amount 1 =

Amount 2 =

Amount 3 =

Dear :

This is in response to your request dated December 27, 2017, as supplemented
by correspondence dated March 6, 2018, and March 30, 2018, in which you
request, through your authorized representative, a waiver of the 60-day rollover
requirement contained in section 402(c)(3)(A) of the Internal Revenue Code (the
“Code”).

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

Taxpayer A represents that he received a stock distribution from Plan B equal to
Amount 2. Taxpayer A asserts that the failure to accomplish a rollover of Amount
3, a portion of the total stock distribution amount, within the 60-day period
described in section 402(c)(3)(A) of the Code, was due to incorrect information
received from his financial advisors.

Taxpayer A participated in Plan B, a 401(k) plan that was maintained by his
employer, Company E. After Taxpayer A retired from Company E in , he met
with his financial advisors, Financial Advisor F and Financial Advisor G of
Company H, to prepare a financial plan for Taxpayer A’s retirement. After
reviewing the assets in Taxpayer A’s Plan B account, which consisted of stock,
cash, and an outstanding loan, Financial Advisors F and G suggested that
Taxpayer A roll over the cash portion of his account in Plan B to an IRA, and that
he receive a distribution of the shares of stock to take advantage of the tax
exclusion of net unrealized appreciation (NUA). On January 28, , Taxpayer A
and his financial advisors also spoke with a benefits representative of Company E
regarding the distribution of the stock. The benefits representative appeared to be
familiar with the exclusion for NUA and indicated that the stock certificates would
be sent directly to Taxpayer A’s residence.

On February 3, , Taxpayer A directly rolled over Amount 1, the cash portion
of his account in Plan B, into IRA D. On April 20, , Taxpayer A contacted
Plan B to inquire about the status of the distribution of Company E stock.
Taxpayer A learned that on April 19, , stock equal to Amount 2 had been
deposited into a non-IRA bank account of Taxpayer A. On May 13, ,
Taxpayer A transferred Amount 2 to Account C, a non-IRA account maintained by
Financial Institution I. In and , Taxpayer A sold some of the shares of
stock. The remaining shares, equal to Amount 3, have been retained in Account
C.

In early , Taxpayer A received a Form 1099-R from Plan B showing that the
entire stock distribution was taxable. After inquiring further, Taxpayer A learned
that because of a deemed loan distribution from Plan B, NUA treatment was
unavailable and the distribution of the shares of stock from Plan B was fully
taxable. Had Taxpayer A been informed that NUA was not available, he would
have rolled over the stock distributed from Plan B into IRA D.

Based on the above facts and representations, Taxpayer A requests a waiver of
the 60-day rollover requirement under section 402(c)(3) of the Code with respect
to the distribution of Amount 3 from Plan B.

With respect to your ruling request, section 401(a) of the Code provides the
qualification rules applicable to retirement plans set up by employers exclusively to
benefit their employees and their beneficiaries.

Section 402(a)(1) of the Code provides that except as otherwise provided in this
section, any amount actually distributed to any distributee by any employees' trust
described in section 401(a) which is exempt from tax under section 501(a) shall be
taxable to the distributee, in the taxable year of the distributee in which distributed,
in the manner provided under section 72 (relating to annuities).

Section 402(c) of the Code provides rules governing rollovers of amounts from
exempt trusts to eligible retirement plans, including IRAs.

Section 402(c)(1) of the Code provides, generally, that if any portion of an eligible
rollover distribution from a qualified employees trust is paid to the employee in an
eligible rollover distribution and the employee transfers any portion of the property
received in such distribution to an eligible retirement plan, and in the case of a
distribution of property other than money, the amount so transferred consists of
the property distributed, such distribution (to the extent so transferred) shall not be
includible in gross income for the taxable year in which paid.

Section 402(c)(2) of the Code provides that the maximum amount of an eligible
rollover distribution to which paragraph (1) applies shall not exceed the portion of
such distribution which is includible in gross income (determined without regard to
paragraph (1)). The preceding sentence does not apply to the distribution to the
extent that such portion is transferred to an eligible retirement plan described in
section 402(c)(8)(B)(i) and (ii).

Section 402(c)(3)(A) of the Code provides, generally, that section 402(c)(1) shall
not apply to any transfer of a distribution made after the 60th day following the day
on which the distributee received the property distributed.

Section 402(c)(3)(B) of the Code provides that the Secretary may waive the 60-
day requirement under subparagraph (A) 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. Only distributions that occur after December 31, 2001, are
eligible for the waiver under section 402(c)(3)(B).

Section 402(c)(4) of the Code defines “eligible rollover distribution” as any
distribution to an employee of all or a portion of the balance to the credit of an
employee in a qualified trust, except that such term shall not include:

(A) any distribution which is one of a series of substantially equal periodic
payments (not less frequently than annually) made --

(i) for the life (or life expectancy) of the employee or the joint lives (or joint
life expectancies) of the employee and the employee's designated beneficiary, or

(ii) for a specified period of 10 years or more,

(B) any distribution to the extent the distribution is required under section
401(a)(9), and

(C) any distribution which is made upon hardship of the employee.

Section 402(c)(6)(A) of the Code provides that the transfer of an amount equal to
any portion of the proceeds from the sale of property received in the distribution
shall be treated as the transfer of property received in the distribution.

Section 402(c)(6)(B) of the Code provides that the excess of the fair market value
of property on sale over its fair market value on distribution shall be treated as
property received in the distribution.

Section 402(c)(6)(D) of the Code provides that no gain or loss shall be recognized
on any sale described in subparagraph (A) to the extent that an amount equal to
the proceeds is transferred pursuant to paragraph (1).

Section 402(c)(8)(B) of the Code defines eligible retirement plan as (i) an
individual retirement account described in section 408(a); (ii) an individual
retirement annuity described in section 408(b) (other than endowment contract);
(iii) a qualified trust; (iv) an annuity plan described in section 403(a); (v) an eligible
deferred compensation plan described in section 457(b) maintained by an eligible
employer as described in section 457(e)(1)(A); and (vi) an annuity contract
described in section 403(b).

Section 402(e)(4)(A) of the Code provides that in the case of a distribution other
than a lump sum distribution, the amount actually distributed to a distributee from a
trust described in section 401(a) which is exempt from tax under section 501(a)
shall not include any net unrealized appreciation in employer securities attributable
to amounts contributed by the employee.

Section 402(e)(4)(B) of the Code provides that in the case of a lump sum
distribution which includes employer securities, there shall be excluded from gross
income the net unrealized appreciation attributable to the part of the distribution
that consists of employer securities.

Revenue Procedure 2003-16, 2003-4 I.R.B. 359, provides that in determining
whether to grant a waiver of the 60-day rollover requirement pursuant to section
402(c)(3)(B) 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.

The information and documentation submitted by Taxpayer A support his assertion
that the failure to accomplish a rollover of Amount 3, a portion of the total stock
distribution amount, within the 60-day period described in section 402(c)(3)(A) of
the Code, was due to incorrect information received from his financial advisors.

Therefore, pursuant to section 402(c)(3)(B) of the Code, the Service hereby
waives the 60-day rollover requirement with respect to the distribution of Amount

3. Provided all other requirements of section 402(c)(3), except the 60-day
   requirement, will be met with respect to the contribution of Amount 3 to an IRA,
   Amount 3 will be considered a rollover contribution within the meaning of section
   402(c)(3).

This ruling does not authorize the rollover of amounts that are required to be
distributed by section 401(a)(9) 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.

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: