Court grants hardship waiver for rollover failure

By James A. Beavers, J.D., LL.M., CPA, CGMA

The Tax Court held that it would be against "equity or good conscience" to deny an ex-NYPD police officer a hardship waiver for failing to meet the 60-day rollover requirement for distributions from a qualified plan for distributions from two retirement plans that he received during a period when he was suffering from a "major depressive disorder."

Background

John Trimmer was an officer with the New York City Police Department (NYPD). In 2011, after 20 years of service, Trimmer retired from the department. Before retiring, he had lined up a job as a security guard for the New York Stock Exchange. However, the job fell through, and he was unable to find another job. The NYPD was prohibited from hiring him back, so Trimmer was left without employment.

Within three weeks of his retirement, Trimmer began showing signs of a major depressive disorder. He became antisocial, irritable, and uncommunicative with his wife and two sons, and he rarely left his house. He had trouble sleeping, lost weight, and neglected his hygiene and grooming. Other than writing checks occasionally, generally at the request of his wife, according to his own testimony, he "kind of just didn't do much of anything." His wife testified that during this time her husband was "like a lost soul," and when she came home from work in the evening, she would often find him where she had left him in the morning.

From his former employment with the NYPD, Trimmer had retirement accounts with the New York City Employees' Retirement System and the New York City Police Pension Fund. On May 27 and June 10, 2011—after his major depression had set in—Trimmer received a distribution check from his retirement accounts, one for $99,990 and the other for $1,680. On July 5, 2011, after the checks had sat on his dresser for over a month, Trimmer deposited them into his and his wife's joint bank account. Trimmer had traditionally handled financial matters for his family, so his wife was unaware of what had occurred.

When Trimmer provided his tax information to his tax preparer, including Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that reflected the retirement account distributions, the tax preparer, noting that the distributions were coded as regular taxable distributions, advised Trimmer to deposit the distributed funds in an IRA. Despite the fact he had not yet deposited the distributions in an IRA, on March 29, 2012, when Trimmer filed his return for 2011, he reported the distributions as nontaxable. However, based on his preparer's advice, on April 16, 2012, he opened an IRA and deposited the distributions into it. Between the time Trimmer received the distributions in 2011 and the time he opened the IRA in 2012 and deposited the distributed funds into the IRA, he and his wife did not make any use of those funds.

On Dec. 16, 2013, the IRS issued Trimmer a Notice CP2000, Proposed Changes to Your 2011 Form 1040, asserting that he had failed to report the two retirement distributions as income and that he was liable for the Sec. 72(t) additional 10% tax on premature distributions from a qualified plan. In response, Trimmer sent a letter to the IRS explaining the details of his situation and imploring the IRS to overlook his failure to timely roll over his retirement plan distributions to an IRA. He asked the IRS to excuse his failure because including the tax resulting from including the distributions in income for 2011 would cause him and his family economic hardship and he had not benefited in any way by not timely rolling over the distributions.

The IRS denied Trimmer's request on the grounds that he had not met the statutory 60-day rollover requirement for distributions from qualified plans in Sec. 402(c)(3)(A). In its denial letter, the IRS did not mention its statutory authority to grant a hardship waiver for violations of the rule or otherwise refer to Trimmer's circumstances. After it later issued a notice of deficiency, Trimmer challenged the IRS's determination in Tax Court.

The Tax Court's decision

The Tax Court held that Trimmer was entitled to a hardship waiver for his failure to timely roll over his distributions from his retirement plans and that the distributions were not includible in income in 2011. The court found in the unique facts and circumstances of his case, pursuant to Sec. 402(c)(3)(B), it would be against equity or good conscience to deny Trimmer a waiver of the 60-day rollover requirement.

Sec. 402(c)(3)(B) provides that the IRS may waive the 60-day rollover requirement in Sec. 402(c)(3)(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." However, the Code does not define the phrase "against equity or good conscience," and it appears nowhere else in the Code (except in Sec. 408(d)(3)(I), which provides identical waiver authority for the analogous 60-day deadline in the IRA distribution context). After reviewing interpretations of other statutes that contain similar language, the Tax Court determined that it should construe "equity or good conscience" to reflect a broad and flexible concept of fairness.

The Tax Court then used Rev. Proc. 2003-16, in which the IRS has provided the factors it will consider when determining whether to grant a hardship waiver, to analyze Trimmer's case. Section 3.02 of the revenue procedure states that in deciding whether a taxpayer should be granted a waiver under Sec. 402(c)(3)(B), all facts and circumstances should be considered, including (1) errors committed by a financial institution; (2) an 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 Tax Court found that the first factor was inapplicable. It found the third factor was favorable to Trimmer because he had not made any use of the distributed funds before he deposited them into an IRA, so he had not profited in any meaningful way by not immediately rolling over the funds into an IRA. The court found that the fourth factor was favorable to Trimmer because he had deposited the funds into an IRA shortly after his preparer informed him of the problem.

With respect to the second factor, the Tax Court considered all the evidence in the record to determine whether Trimmer suffered from a disability at the relevant time that prevented him from completing a rollover. It noted that his depression caused a marked change in his activity level and many deleterious changes in his behaviors, and that his wife had testified that she felt she needed to monitor him and help him through activities and events. Based on the evidence, the court found that "Trimmer's major depressive disorder constituted a disability throughout the relevant period for the purposes of section 402(c)(3)(B) in that it significantly impaired his ability to perform day-to-day activities" (slip op. at 50). It found that his failure to meet the 60-day rollover requirement was attributable to his disability because the disorder started before he received the retirement distributions and continued through the relevant period, and, based on the same facts that led the court to conclude Trimmer had a disability, that the disability significantly impaired his ability to complete a rollover.

The court also reviewed private letter rulings that dealt with similar situations involving the application of the hardship waiver in Sec. 402(c)(3)(B). The court observed that letter rulings have no precedential effect, but they can be helpful to a court to reveal an agency's interpretation of a statute. The court stated that it found no letter rulings "espousing an interpretation of section 402(c)(3)(B)—or the identical provision of section 408(d)(3)(I)—that is inconsistent with granting a waiver" (slip op. at 52). Thus, the court concluded that granting Trimmer a waiver was consistent with the interpretation of the hardship waiver provision the IRS had used in other cases throughout the years.

Reflections

In performing its analysis of Trimmer's case under the factors from Section 3.02 of Rev. Proc. 2003-16, the Tax Court found that the fourth factor supported Trimmer because he deposited the distributions soon after he became aware that he had failed to properly complete a rollover. Seemingly, based on the language of Rev. Proc. 2003-16, under the fourth factor, the court should have been considering the lapse of time between when Trimmer received the distribution and when he deposited the distributed funds in an IRA, not how much time had lapsed between the time Trimmer realized he had a problem and when he fixed it. However, even if it had done this, it seems likely it would have ruled in Trimmer's favor.

Trimmer, 148 T.C. No. 14 (2017)

Newsletter Articles

SPONSORED REPORT

CPEOs provide peace of mind around payroll services

The creation of these new IRS-certified service providers for small businesses clarifies some issues around traditional professional employer organizations.

PRACTICE MANAGEMENT

2016 Best Article Award

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”