October 7, 2014

60 Day IRA Rollover Rules: Upcoming Changes in IRS Guidance, Effective January 1, 2015

By Wes Lai

60 Day IRA Rollover Rules: Upcoming Changes in IRS Guidance, Effective January 1, 2015 Tax & Business

A recent Tax Court decision (Bobrow V. Commissioner) held that the language of the Internal Revenue Code limits a taxpayer to one IRA rollover contribution per year, on an aggregate basis. However, this ruling is in stark contrast to proposed regulations, which provide that taxpayers are allowed to make annual tax free IRA rollover contributions to each separate account owned by an individual, as opposed to the aggregate basis, allowing just one annual rollover among all accounts owned by an individual.

Notwithstanding the above ruling, it should be emphasized that there is no limit in the amount of direct trustee-to-trustee IRA transfers allowed to an individual. As such, transfers are not rollovers and, therefore, are not subject to the one rollover-per-year limitation. Also, there is no limit in the amount of rollovers an individual can make from traditional IRAs to Roth IRAs.

Generally, a qualified retirement plan distribution is includible in gross income. However, if a distribution is repaid (rolled over) into an IRA, or other eligible retirement plan within 60 days of distribution, such distribution will be considered a tax-free rollover contribution if the individual has not made a similar tax-free rollover contribution during the one year period preceding the date of the receipt. (Note: The one year period begins on the date of receipt and is not based on the calendar year.)

Facts in the Tax Court Case
Alvan Bobrow (petitioner), an attorney specializing in tax law, requested and received two IRA distributions in 2008. Mr. Bobrow rolled over both IRA distributions within 60 days of each respective IRA distribution. However, according to the IRS, only the first of his two distributions qualified for the tax-free rollover.

Petitioner’s Position
In his argument, Bobrow asserted that the tax-free IRA rollover rules were meant to be applied separately to each IRA owned by a taxpayer and not on an aggregate basis limiting an individual to just one annual tax-free rollover during a one year period among all accounts owned by the individual. Bobrow, an attorney specializing in tax law (which he stated several times in his argument), only offered that he analyzed the transactions at issue and conluded that the transactions should all be treated as nontaxable. However, Bobrow did not offer any case law or statutes to support his position.

The Court’s Opinion
With respect to Alvan Bobrow’s distributions, the Court ruled that although both of his IRA distributions were rolled over within 60 days of each respective distribution date, only the first of his two distributions qualified for the tax-free rollover. The Court looked at the language of the code as well as the legislative history and intent of Congress in ruling that only one rollover is allowed to a taxpayer during any twelve month period, regardless of the number of IRA’s owned by the taxpayer. In its decision, the Court stated “the Internal Revenue Code limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution. The one year limitation is not specific to any single IRA maintained by an individual, but instead applies to all IRAs maintained by a taxpayer. An individual may not 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 individual retirement annuity’. In other words, a taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year.”

Additionally, the Court opined that if Congress had intended to allow individuals to take nontaxable distributions from multiple IRAs annually, the Code Section would have been worded differently.

Within two months after the Court’s January 28, 2014 decision, the IRS announced that it anticipates following the Court’s interpretation limiting one tax-free IRA rollover contribution per year, on an aggregate basis. As noted in the introduction, the IRS’s current guidance provided under proposed regulations and Publication 590, contradict the Court’s interpretation. Accordingly, the IRS has since made a change in its guidance.

However, due to the administrative challenges to be faced by IRA trustees (e.g., banks) in implementing the Court’s interpretation of the statute, in no event would the regulation be effective sooner than January 1, 2015. Therefore, the IRS, in effect, is granting a grace period through the end of this year for individuals to follow its current interpretation and guidance allowing individuals to make an annual tax-free IRA rollover contribution on each IRA owned by the individual.

In conclusion, taxpayers should also be reminded that although guidance offered by the IRS in the form of IRS Publications and Proposed Treasury Regulations may be helpful sources of information, caution should be taken by taxpayers, as such IRS guidance can erroneously misinterpret the statutes, as evidenced by the IRS’s misinterpretation of the aforementioned rollover rules. Moreover, as cited in court decisions, IRS Publications, Proposed Treasury Regulations and other IRS guidance do not carry legal precedent and therefore should not be cited to sustain a position, as neither the IRS nor the Courts are bound by IRS guidance, as such guidance do not have the weight of legal authority.

If you have a question related to this case or your personal rollover IRA, contact your Marcum Tax Professional.

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