PLR 200407025: Medical problems and brokerage misunderstanding justify IRA rollover waiver

Plain-English summary

An older IRA owner with medical and hearing problems intended to diversify investments, but a misunderstanding with a brokerage firm led to money being transferred from his IRA to a personal account. He discovered the mistake after the normal 60-day rollover period had expired. The IRS found that his medical condition and the brokerage misunderstanding caused an unexpected distribution and waived the deadline under IRC § 408(d)(3)(I). He received 60 days from the letter's issuance to return the amount to his IRA, provided the other rollover requirements were met.

Ruling snapshot

• Question: May the IRA owner receive a waiver of the 60-day rollover deadline after the mistaken distribution?
• Outcome: Approved a waiver and a new 60-day contribution period.
• Key authorities: IRC § 408(d)(3)(I); Rev. Proc. 2003-16.

Full text (IRS public release)

200407025

INTERNAL REVENUE SERVICE

Uniform Issue List: 408.03-00
NOV 17 2003

Legend:

Taxpayer A=

Amount B=

IRA C=

Brokerage Firm D=

Dear :

This is in response to your request of July 31, 2003, through your authorized representative, for a waiver of the 60-day rollover requirement contained in section 408(d)(3) of the Internal Revenue Code (the Code).

The following facts and representations have been submitted under penalty of perjury in support of the ruling requested:

Taxpayer A is an 83-year old widower. During the past two years Taxpayer A has been in and out of the hospital for various medical reasons. He has been showing increasing signs of confusion and misunderstanding which is worsen by a serious hearing problem. During the early part of 2003, Taxpayer A entered into a dialogue with Brokerage Firm D to diversify his investment portfolio in order to maximize the return on his money.

200407025

Page 2

Taxpayer A had IRA C and other investment accounts with Brokerage Firm D. Apparently, there was a serious misunderstanding between Taxpayer A and the broker of Brokerage Firm D regarding the accounts to be used for various investment transactions. Due to the misunderstanding between the parties, Amount B was transferred from IRA C to one of Taxpayer A’s personal accounts. It was never Taxpayer A’s intention to deplete his IRA C account by these investment withdrawals and to create any adverse tax consequences.

Taxpayer A had funds other than those in IRA C to diversify his investments. It was not until Taxpayer A contacted his customary tax advisers that he realized that Amount B in IRA C had been incorrectly transferred to Taxpayer A’s personal account. Any effort to rectify the incorrect distributions was too late because the 60-day period allowed by the Internal Revenue Code (the Code) to avoid the tax liability had already expired.

Based on the above facts and representations, you request that the Service waive the 60-day rollover requirement with respect to the distribution of Amount B because of your medical condition and the misunderstanding with Brokerage Firm D and that the failure to waive such requirement would be against equity or good conscience.

Section 408(d)(1) of the Code provides that, except as otherwise provided in section 408(d), any amount paid or distributed out of an IRA shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72 of the Code.

Section 408(d)(3) of the Code defines, and provides the rules applicable to IRA rollovers.

Section 408(d)(3)(A) of the Code provides that section 408(d)(1) of the Code does not

apply to any amount paid or distributed out of an IRA to the individual for whose benefit the IRA is maintained if—

(i) the entire amount received (including money and any other property) is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan (other than an IRA) for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to section 408(d)(3)).

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Section 408(d)(3)(B) of the Code provides that section 408(d)(3) does not apply to any amount described in section 408(d)(3)(A)(i) received by an individual from an IRA if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in section 408(d)(3)(A)(i) from an IRA which was not includible in gross income because of the application of section 408(d)(3).

Section 408(d)(3)(D) of the Code provides a similar 60-day rollover period for partial rollovers.

Section 408(d)(3)(I) of the Code provides that the Secretary may waive the 60-day requirement under sections 408(d)(3)(A) and 408(d)(3)(D) of the Code where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement. Only distributions that occurred after December 31, 2001, are eligible for the waiver under section 408(d)(3)(I) of the Code.

Rev. Proc. 2003-16, 2003-4 I.R.B. 359, provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to section 408(d)(3)(I), the Service will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.

The information presented by Taxpayer A indicates that his overall medical conditions and the misunderstanding with Brokerage Firm D’s personnel caused an unexpected distribution from IRA C.

Therefore, pursuant to section 408(d)(3)(I) of the Code, the Service hereby waives the 60-day rollover requirement with respect to the distribution of Amount B. Taxpayer A is granted a period of 60 days from the issuance of this ruling letter to contribute Amount B into IRA C. Provided all other requirements of section 408(d)(3) of the Code, except the 60-day requirement, are met with respect to such contributions, these amounts will be considered rollover contributions within the meaning of section 408(d)(3) of the Code.

No opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the Code or regulations which may be applicable thereto.

This letter is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

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A copy of this letter has been sent to your authorized representative in accordance with a power of attorney on file in this office.

If you wish to inquire about this ruling, please contact ,I.D.# , at
. Please address all correspondence to

Sincerely yours,

Alan C. Pipkin, Manager
Employee Plans Technical Group 4

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose

Cc: