The Tax Court held that where a taxpayer distributed and within 60 days repaid funds from two separate individual retirement accounts (IRAs) within a one-year period, only the first distribution and repayment was a nontaxable rollover under Sec. 408(d)(3)(A).
Alvan Bobrow and his wife, Elisa, maintained various accounts at Fidelity Investments during 2008. As relevant to this case, Mr. Bobrow maintained a traditional IRA and a rollover IRA with Fidelity. Mrs. Bobrow also maintained a Fidelity Funds traditional IRA. In addition to their IRAs, the Bobrows had a joint Fidelity checking account. Mr. Bobrow also had an individual Fidelity checking account.
On April 14, 2008, Mr. Bobrow took two distributions from his traditional IRA in the combined amount of $65,064. On June 6, 2008, he took a $65,064 distribution from his rollover IRA. On June 10, 2008, he transferred $65,064 from his individual account to his traditional IRA. On July 31, 2008, Mrs. Bobrow took a $65,064 distribution from her traditional IRA that was deposited in the couple’s joint account. On Aug. 4, 2008, the Bobrows transferred $65,064 from their joint account to Mr. Bobrow’s rollover IRA. On Sept. 30, 2008, Mrs. Bobrow transferred $40,000 from their joint account to her traditional IRA. The Bobrows claimed that Mrs. Bobrow had requested Fidelity to transfer the amount that was distributed back to the IRA sometime before Sept. 30.
The Bobrows treated each IRA distribution as part of a nontaxable rollover and did not include any of the amounts distributed in income. The IRS disagreed with this treatment and determined that only one of Mr. Bobrow’s distributions and repayments was a nontaxable rollover, and that his other distribution and Mrs. Bobrow’s distribution were taxable distributions that should have been included in the Bobrows’ income. The Bobrows challenged the IRS’s determination in Tax Court.
IRA Rollover Rules
Generally, Sec. 408(d)(1) provides that any amount distributed from an individual retirement plan is includible in gross income of the taxpayer for whose benefit the account is maintained. However, Sec. 408(d)(3)(A) allows the taxpayer to exclude the distribution from gross income if the entire amount is subsequently paid into a qualifying IRA, individual retirement annuity, or retirement plan not later than the 60th day after the day on which he or she receives the distribution (a rollover). Under Sec. 408(d)(3)(B), a taxpayer may make a partial rollover of a distribution.
Sec. 408(d)(3)(B) limits a taxpayer from performing more than one nontaxable rollover in a one-year period with regard to IRAs and individual retirement annuities. This one-year period relates to the date a taxpayer takes the distribution in a rollover transaction.
The Parties’ Positions
With regard to Mr. Bobrow’s distributions/repayments, the Bobrows claimed that the Sec. 408(d)(3)(B) limitation on rollovers is specific to each IRA maintained by a taxpayer and does not apply across all of a taxpayer’s IRAs. Thus, because each of Mr. Bobrow’s distribution/repayments was from a different account, the limitation did not apply, and each was a nontaxable rollover. The IRS contended, per Martin, T.C. Memo. 1992-331, that the Sec. 408(d)(3)(B) limitation was not specific to an IRA and that a taxpayer can only make one tax-free rollover within a one-year period. The Bobrows asserted that the Martin case only stood for the proposition that a taxpayer could not make two rollovers in a one-year period from the same IRA account.
With respect to the distribution/repayment from Mrs. Bobrow’s account, the IRS made two arguments for why the distribution was ineligible for nontaxable rollover treatment: (1) the funds were not returned to Mrs. Bobrow’s IRA, and (2) repayment of funds was not made within 60 days. The Bobrows argued that it did not matter if the exact funds that had been distributed were the funds that were repaid into the IRA and that the untimely repayment should be excused under Sec. 408(d)(3)(I) because it was due to an error by Fidelity.
The Tax Court’s Decision
The Tax Court held that of the three sets of transactions, only the first one by Mr. Bobrow qualified as a nontaxable rollover. The court found that for Mr. Bobrow’s transactions, the plain language of the law and Tax Court precedent did not allow him to make two rollovers in a one-year period. For Mrs. Bobrow’s transaction, the court found that she failed to meet the 60-day requirement for a valid rollover and was not entitled to an exception to that requirement.
The court noted that the plain language of Sec. 408(d)(3) speaks in general terms, stating that an individual cannot receive a nontaxable rollover from “an individual retirement account or individual retirement annuity” if that individual has already received a tax-free rollover within the past year from “an individual retirement account or an individual retirement annuity.” This means a nontaxable rollover from any IRA within a one-year period of a nontaxable rollover from any IRA. The court stated that it believed that if Congress had meant for this rule to apply to specific accounts, it would have worded the provision differently. In support of this point, the court pointed to several statements in the legislative history of Sec. 408(d)(3) that indicated Congress intended the provision to apply to IRA accounts in general and not to each specific IRA account.
With respect to Mrs. Bobrow’s transaction, the Tax Court disagreed with the IRS’s first argument regarding the funds that were repaid to Mrs. Bobrow’s IRA. The IRS claimed that because Mrs. Bobrow distributed the funds first to the couple’s joint account and the couple then transferred the distributed amount from the joint account to Mr. Bobrow’s rollover IRA, the July 31, 2008, distribution was paid into an IRA set up for the benefit of Mr. Bobrow and not into an IRA set up for the benefit of Mrs. Bobrow. The court, however, found, as the Bobrows argued, that money is fungible, and the use of funds distributed from an IRA during the 60-day period is irrelevant to the determination of whether the distribution is a nontaxable rollover contribution.
The IRS fared better with its second argument. The Bobrows and the IRS agreed that only $40,000 had been repaid to Mrs. Bobrow’s IRA on Sept. 30, and that this was 61 days from the date Mrs. Bobrow distributed the funds from her IRA. The Bobrows, however, asserted that the full amount of the distribution would have been repaid to Mrs. Bobrow’s account but for Fidelity’s failure to follow Mrs. Bobrow’s instructions, so the failure to meet the 60-day requirement should be excused under Sec. 408(d)(3)(I). The court explained that, per Rev. Proc. 2003-16, taxpayers who fail to meet the 60-day requirement may either (1) apply for a hardship exception to the requirement or (2) receive an automatic waiver of the requirement if the taxpayer meets the conditions in the revenue procedure. However, Mrs. Bobrow did not apply for a hardship waiver and provided no evidence that showed that she qualified for an automatic waiver under the terms of Rev. Proc. 2003-16, so the court concluded she was not entitled to an exception from the 60-day requirement.
While it is not clear from the Tax Court’s opinion whether the Bobrows’ problems were a result of ignorance of the IRA rollover rules or a disregard of them, Mr. Bobrow, who is a tax lawyer, seemingly should have been aware of the rules. However, the average person is not knowledgeable about these rules and can easily run afoul of them. Practitioners should periodically remind clients with IRAs to consult with them any time they are considering rolling over those funds, to ensure that they do not make any costly mistakes.
Editor's note: For the IRS response to this decision, see "IRA Rollover Guidance Issued: IRS Will Follow the Tax Court."
Bobrow, T.C. Memo. 2014-21