PLR 200438046: Broker error permits rollover of excess IRA withdrawal

Plain-English summary

A broker told an IRA owner to withdraw 26.2 percent for a required minimum distribution instead of calculating the distribution with a divisor of 26.2. The mistake caused the owner to withdraw more than required, and the ordinary 60-day rollover period expired before he discovered it. The IRS waived that deadline for the excess portion and granted 60 days from the ruling date to contribute that amount to another IRA. The required distribution itself cannot be rolled over under this ruling.

Ruling snapshot

• Question: May the owner roll over the part of an IRA withdrawal caused by the broker's calculation error?
• Outcome: Approved for the excess amount only, with 60 days from the ruling date to contribute it.
• Key authorities: IRC §§ 408(d)(3)(I), 408(d)(3)(E); Rev. Proc. 2003-16.

Full text (IRS public release)

200438046

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

JUN 24 2004

Uniform Issue List: 408.03-00

Legend:

Taxpayer A =

Amount D =
Amount E =

Broker S =

Dear

In a letter dated March 30, 2004, you requested 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 withdrew funds from his Individual Retirement Account (IRA) with Broker S and deposited during calendar year , a portion of these funds, approximately Amount D, in Taxpayer A’s non IRA account with Broker S. Taxpayer A was mislead by Broker S’s erroneous instructions to withdraw a required minimum distribution of 26.2 percent instead of a distribution based upon a divisor factor of 26.2. The result was that a significant portion of Amount D was erroneously withdrawn from Taxpayer A’s IRA.

Amount E represents the difference between Amount D and the properly calculated minimum required distributions for calendar years and .

Based on the facts and representations, you request that the Internal Revenue Service waive the 60-day rollover requirement with respect to the distribution of Amount E because the failure to waive such requirement would be a hardship and against equity or good conscience.

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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)).

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.

Code section 408(a)(6) provides, in general, that rules similar to the rules of section 401(a)(9) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

Code section 408(d)(3)(E) provides that paragraph 408(d)(3) shall not apply to any amount to the extent such amount is required to be distributed under subsection (a)(6).

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

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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.

Revenue Procedure 2003-16, 2003-4 I.R.B. 359, (January 27, 2003) 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 demonstrates an error on the part of

Broker S. Taxpayer A believed that Broker S had correctly told him the amount of his first minimum required distribution. Instead, Broker S miscalculated, and, as a result, a much larger distribution than necessary, totaling Amount D, was made. When Taxpayer A discovered this error, the 60-day rollover period had expired. The transaction initiated by Broker S resulted in Taxpayer A's failing to effect a rollover with the requisite 60 days.

Therefore, pursuant to Code section 408(d)(3)(I), the Service hereby waives the 60-day rollover requirement with respect to the withdrawal of Amount E. Pursuant to this ruling letter, Taxpayer A is granted a period of 60 days measured from the date of the issuance of this letter ruling to make a rollover contribution of an amount equal to Amount E to another IRA (or IRAs) described in Code section 408(a). Provided all other requirements of Code section 408(d)(3), except the 60-day requirement, are met with respect to such IRA contribution, the contribution will be considered a rollover contribution within the meaning of Code section 408(d)(3).

Please note that, pursuant to Code section 408(d)(3)(E), this ruling letter does not authorize the roll over of any amounts required to be distributed. Thus you may roll over Amount E, as requested, and not Amount D.

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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If you wish to inquire about this ruling, please contact I.D. #
, at
. Please address all correspondence to SE:T:EP:RA:T3.

Sincerely yours,

Frances V. Sloan, Manager
Employee Plans Technical Group 3

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