Posted by Maria Hurd, CPA
Although the Internal Revenue Code trumps IRS Publications, practitioners tend to use the Publications as the initial resource when handling day-to-day tax issues. However, the Publications were not part of petitioner’s research in the United States Tax Court case of ALVAN L. BOBROW AND ELISA S. BOBROW, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent, in which the self-declared prominent tax attorney did not use Publication 590’s examples as backup for his position that a taxpayer can execute one 60-day IRA Rollover per IRA account, as opposed to one per year.
It is important to note that the one-year limitation applies only to 60-day IRA rollovers, or nontaxable rollovers. Trustee-to -trustee transfers are unlimited, because transferring funds directly between trustees does not constitute a distribution within the meaning of Code Section 408(d)(3)(B). It would appear that the goal of the limitation is to prevent taxpayers from using their IRAs for short-term cash flow purposes.
According to IRS Publication 590, if a taxpayer takes money from IRA-1 and moves it to IRA-3, the one-year waiting period applies from the date of the withdrawal to both IRA-1 and IRA-3, but it won’t apply to IRA-2, which was not involved in the rollover. This language in the Publication is directly contrary to the language of Section 408(d), which governs distributions from qualified retirement plans. Section 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. The one-year limitation period begins when a taxpayer takes a nontaxable distribution from an IRA, without regard to the calendar year. As a result, a taxpayer may not make a nontaxable rollover on December 31 in one calendar year and make another nontaxable rollover on January 1 in the next calendar year.
In the end, the Court concluded that the petitioner had cited no authority for the position that the limitation on nontaxable distributions applies only to withdrawals from the same IRA; rather, he only cited his expertise as a tax attorney and unsubstantiated representations by Fidelity concerning the structure of the transactions.
The Road Ahead
To acknowledge and address the discrepancy of its own guidance, the IRS website has published the IRA One-Rollover-Per-Year-Rule stating that it intends to follow the Tax Court’s application of IRC Section 408(d)(3)(B), but that it will delay implementation until January 1, 2015 at the earliest, such that:
- Beginning as early as January 1, 2015, taxpayers can make only one nontaxable rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs the taxpayer owns (Announcement 2014-15).
- Trustee-to-trustee transfers between IRAs are unlimited because this type of transfer isn’t a rollover (Revenue Ruling 78-406, 1978-2 C.B. 157)
- Rollovers from traditional IRAs to Roth IRAs (“conversions”) are unlimited
Additionally, due to their contradictory language, Proposed Treasury Regulation Section 1.408-4(b)(4)(ii) will be withdrawn and Publication 590 will be revised to reflect the new interpretation.