PLR 200505028: Broker error leads to waiver of IRA rollover deadline

Plain-English summary

An IRA owner intended to move an IRA investment account to another firm. A broker and its representative supplied the wrong account-opening forms, causing the funds to land in an ordinary account rather than an IRA. The error came to light after the owner received an IRS tax invoice, and the representative admitted the mistake in writing. The IRS waived the 60-day rollover deadline under IRC § 408(d)(3)(I) and gave the owner 60 days from the ruling date to contribute the amount to an IRA. The ruling excludes any amount that had to be distributed under the required distribution rules.

Ruling snapshot

• Question: Could the owner receive a waiver after the broker opened a non-IRA account by mistake?
• Outcome: Approved, with 60 days to complete the IRA rollover.
• Key authorities: IRC §§ 408(d)(3)(I), 408(d)(3)(E); Rev. Proc. 2003-16.

Full text (IRS public release)

200505028

NOV - 9 2004

Uniform Issue List: 408.03-00
SE:T:EP:RA:T3

Legend:

Taxpayer A =

Amount D =

Broker/Dealer R =

Investment Firm P =
Investment Firm M =
Registered Representative G =

Dear [illegible]

In a letter dated July 29, 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:

Through the services of Broker/Dealer R and its Registered Representative G, Taxpayer A maintained an Individual Retirement Account (IRA) investment account with Investment Firm P, and in [illegible] decided to rollover that IRA investment account from Investment Firm P to Investment Firm M. Broker/Dealer R and its Registered Representative G erroneously issued Taxpayer A the wrong Investment Firm M account opening paperwork when Taxpayer A attempted to an IRA rollover account. Specifically, Broker/Dealer R and Registered Representative G erroneously opened an account with Amount D on [illegible], as a standard non-IRA account when it had intended to open the account as a qualified IRA rollover account. This error was not discovered until 2004, when Taxpayer A received an Internal Revenue Service invoice for outstanding federal taxes. Taxpayer has not taken any distribution from the account.

It is represented that Registered Representative G has admitted in writing to the
[illegible] erroneous deposit of Amount D into a non-IRA account.

200505028

2

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 D because the failure to waive such requirement would be a hardship and 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)).

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).

200505028

3

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.

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 that the failure of Taxpayer A to establish a rollover contribution to another IRA within 60 days of receiving Amount D

is due to the error of Broker/Dealer R when it erroneously opened Taxpayer A's attempted rollover account as a standard non-qualified account. Taxpayer A clearly intended to rollover Amount D and but for the oversight would have made a timely contribution to a rollover IRA. By the time Taxpayer A discovered the problem the 60- day rollover period had expired.

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 D. 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 D, except as noted below, 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 rollover of any amounts required to be distributed.

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.

200505028

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If you wish to inquire about this ruling, please contact [illegible], I.D. # [illegible]
[illegible], at (202)[illegible]. 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