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Tax Court Imposes New Limitation on IRA Rollovers
In Bobrow v. Commissioner, TC Memo 2014-21, by a decision issued Jan. 28, U.S. Tax Court Judge Joseph Nega surprisingly ruled that Internal Revenue Code (IRC) Section 408(d)(3)(B), which allows one tax-free 60-day rollover per year, applies to all of a taxpayer's IRAs, rather than to each IRA separately. This is a noteworthy decision because it directly conflicts with the widely held understanding of the rules applicable to 60-day rollovers by professionals in the industry, based on longstanding guidance on this topic provided to taxpayers in IRS Publication 590.
IRC Section 408(d) governs taxation of distributions from qualified retirement plans and IRAs. The general rule is that any amount distributed out to a taxpayer from his or her retirement plan benefit or IRA would be includible in such taxpayer's gross income (subject to relevant tax basis rules). However, IRC Section 408(d)(3)(A) allows the taxpayer to exclude from gross income any amount distributed from an IRA if the entire amount is subsequently paid into a qualifying IRA, individual retirement annuity, or retirement plan within 60 days of the day on which the taxpayer received the distribution. This 60-day tax-free rollover exception is often referred to as a “rollover contribution.” Pursuant to Section 408(d)(3)(B), such exception has always only been allowed once during every 12-month period, beginning on the date a taxpayer withdraws funds from an IRA.
In Bobrow, taxpayers (a husband and wife) each received distributions from several IRAs, and, in turn, deposited those distributions into IRAs. The taxpayers did not report any of the IRA distributions as income because, consistent with the IRS guidance in Publication 590, they asserted that they were tax-free rollovers of the distributions received and that the Section 408(d)(3)(B) limitation is specific to each IRA maintained by a taxpayer rather than across all of a taxpayer's IRAs. The Tax Court disagreed, ruling that the one-year 60-day limitation applies, across the board, to all of the taxpayers' IRAs (to each of the husband and wife separately). Accordingly, the Tax Court concluded that not all of the transfers were considered tax-free rollovers since more than one occurred during a 12 month period. Publication 590 is not mentioned in the Tax Court's opinion, so, it's not clear whether or not it was considered by Nega.
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