IRS Expands Transitional Relief From Limitations on Rollovers

IRS Expands Transitional Relief From Limitations on Rollovers

The aggregation rule will only apply to distributions from different IRAs if each of the distributions occurs after 2014

The Internal Revenue Service has expanded the transitional relief from the limitation on individual retirement account rollovers to one in 12 months

The Law

Internal Revenue Code Section 408(d)(3)(B) precludes an IRA owner from performing more than one nontaxable rollover within a year, without regard to the source. 

IRC Section 408(d)(3)(B) provides:

This paragraph [regarding tax-free rollovers] does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.

Prior IRS Pronouncements

Notwithstanding the statute, the IRS previously issued proposed regulations, a Publication and at least one private letter ruling applying the limitation on rollovers on an IRA-by-IRA basis.1

Prior Tax Court Decisions

In two prior cases, the Tax Court applied the statute to limit IRA owners to one rollover in 12 months, regardless of the source.2

The issue of whether the limitation on rollovers applies on an IRA-by-IRA basis or on an aggregate basis arose again in Alvan L. Bobrow.3  The Tax Court applied the statute, limiting the taxpayer to one rollover within 12 months.

Many people were surprised at the result in Bobrow, because the proposed regulations had been in existence since 1981 and because the IRS applied the limitation on an IRA-by-IRA basis in its own Publication 590.

However, there was nothing in the Tax Court’s opinion to suggest that the taxpayer had mentioned either the Proposed Regulations or Publication 590.

In any event, taxpayers can’t rely on Proposed Regulations.4 Nor can taxpayers rely on IRS Publications.5

Initial Transitional Relief

In Announcement 2014-15,6, the IRS acknowledged that the proposed regulations and Publication 590 apply the limitation on an IRA-by-IRA basis, while the Tax Court decision in Bobrow interpreted Section 408(d)(3)(B) on an aggregate basis.

However, to give IRA trustees time to change their processing of rollovers and their disclosure documents, the IRS said it they wouldn’t apply Bobrow to rollovers occurring before Jan. 1, 2015. 

The IRS withdrew the proposed regulations, and said that it any new regulations wouldn’t be effective before Jan. 1, 2015.

Expanded Transitional Relief

In Announcement 2014-32,7 the IRS expanded the transitional relief.  Under the expanded transitional relief, distributions in 2014 that are rolled over won’t be taken into account in determining whether a 2015 distribution can be rolled over.  In other words, the aggregation rule will only apply to distributions from different IRAs if each of the distributions occurs after 2014.

So, for example, if an IRA owner takes a distribution from IRA #1 in 2014 and rolls it over within 60 days, the IRA owner will be able to take a distribution from IRA #2 in 2015 and roll it over, even if the distributions are within 12 months of each other.

The IRS also pointed out that traditional IRAs and Roth IRAs are aggregated for purposes of the limitations on rollovers.  So, for example, if in 2015 an IRA owner takes a distribution from a traditional IRA and rolls it over with 60 days, he can’t also take a distribution from a Roth IRA and roll it over.        

Endnotes

  1. Proposed Treasury Regulations Section 1.408-4(b)(4)(ii) (1981); Publication 590, Private Letter Ruling 8731041 (May 6, 1987).
  2. Bidyat K. Bhattacharyya, T.C. Memo. 2007-19 (2007):  http://ustaxcourt.gov/InOpHistoric/Bhattacharyya.TCM.WPD.pdf; Marshall H. Martin, T.C. Memo 1992-331 (1992):  www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl8dd0/2/docaff’d., 987 F.2d 770 (5th Cir. 1993).
  3. Alvan L. Bobrow, T.C. Memo. 2014-21 (Jan. 27, 2014):  http://ustaxcourt.gov/InOpHistoric/BobrowMemo.Nega.TCM.WPD.pdf.
  4. Internal Revenue Manual Section 32.1.1.2.2(2).
  5. Cheryl J. Miller, 114 T.C. 184, 195 (2000):  http://scholar.google.com/scholar_case?case=12346943473598395184&q=miller+114+t.c.+184&hl=en&as_sdt=4,192; Internal Revenue Manual Section 4.10.7.2.8(1).
  6. www.irs.gov/pub/irs-drop/a-14-15.pdf.
  7. www.irs.gov/pub/irs-drop/a-14-32.pdf
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