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Relief Allowed for Missed Rollover Deadline

Tax Court finds both that a bookkeeping error caused delay and that the petitioner was entitled to a hardship waiver.

In Burack v. Commissioner (TC Memo 2019-83), the Tax Court ruled on whether a taxpayer rolled over an individual retirement account distribution into an IRA within 60 days despite the distribution not being recorded into the receiving IRA until after the 60-day period had expired.

Internal Revenue Code Section 408(d)(3) provides that a recipient of an IRA distribution can exclude from gross income any amount distributed from an IRA if the full amount is subsequently rolled over into an IRA not later than the 60th day after the recipient received the distribution.

Check Redeposited After 60 Days

In Burack, on June 25, 2014, petitioner received a $524,980 distribution from her IRA, which was held with Capital Guardian/Pershing. She used this distribution to purchase her current home while waiting for the sale of her former home to close. She intended to roll over the distribution back into her IRA within 60 days of receipt. On Aug. 21, 2014, the sale of her former home closed, and on the same day, she received a cashier’s check to redeposit back into the IRA. Petitioner testified that Capital Guardian assured her that she could redeposit the distribution into her IRA by overnighting the check to Capital Guardian. On Aug. 21, 2014, petitioner overnighted the check to Capital Guardian, and the check arrived at Capital Guardian on Friday, Aug. 22, which was 58 days after petitioner received the IRA distribution. On Aug. 26, 2014, 62 days after petitioner received the IRA distribution, the check was deposited into petitioner’s IRA. What happened between Capital Guardian’s receipt of the check and the deposit at Pershing wasn’t entirely clear. Petitioner never communicated with Pershing and appeared to have communicated with Capital Guardian only about the account. The Commissioner subsequently issued a notice of deficiency, in which he determined that petitioner didn’t repay the IRA distribution until more than 60 days after she received it. Accordingly, the Commissioner determined that petitioner was required to include $524,980 of the IRA distribution in her 2014 gross income. Petitioner timely filed a petition with the Tax Court.

The issue before the Tax Court was whether petitioner rolled over the distribution into an IRA within 60 days and therefore avoided taxation on the initial distribution. Despite the IRA distribution not being redeposited until 62 days after receipt, petitioner argued that: (1) the rollover wasn’t recorded as timely because of a bookkeeping error by Capital Guardian; and (2) she’s entitled to a hardship waiver under IRC Section 408(d)(3)(I).

Bookkeeping Error

The taxpayer relied on Wood v. Comm’r (93 T.C. 114 (1989) for her first argument. In Wood, a taxpayer transferred stock to the custodian before the expiration of the 60-day rollover period with the instruction that the shares be deposited into his IRA. However, the custodian’s records showed that the shares were deposited into a nonqualified account and rolled over into the IRA after the expiration of the 60-day rollover period. In deciding whether the transaction qualified for rollover treatment, the Tax Court looked at the substance of the transaction and the relationship between the taxpayer and the custodian. The court determined that when book entries conflict with the facts, the facts control and that the transaction at issue was entitled to rollover treatment because the custodian had accepted the stock for deposit to the IRA rollover account and held the stock subject to the IRA trust instrument. The custodian’s failure to record the transfer within 60 days was a bookkeeping error.

The respondent counterargued that Wood was inapplicable because Pershing was the custodian, and, therefore, petitioner should have deposited the check directly with Pershing. However, the court pointed out that petitioner’s IRA was held with both Capital Guardian and Pershing in a single account bearing the same account number and that the IRA statement listed both Capital Guardian and Pershing. The court stated that the substance of the relationship between petitioner and Capital Guardian showed that Capital Guardian was an appropriate institution for petitioner to send the check to.

It was undisputed that Capital Guardian received the check 58 days after petitioner received the distribution, but the transaction wasn’t recorded by Capital Guardian until 62 days after petitioner received the distribution. Because of this, the court found Wood to be applicable and that the late recording was due to a bookkeeping error. Although the court found that the existence of the bookkeeping error was enough to conclude that the distribution qualified for rollover treatment, as an alternative ground they also considered whether petitioner was eligible for a hardship waiver.

Hardship Waiver

Revenue Procedure 2003-16 provides guidance about hardship waivers and states that an automatic hardship waiver is granted only: (1) if the funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period; and (2) had the financial institution deposited the funds as instructed, it would have been a valid rollover. Therefore, the court concluded that the petitioner was also eligible for the automatic hardship waiver.

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