PLR 200850053: a second ruling on an early-distribution tax the letter never shows could apply

Plain-English summary

Taxpayer A withdrew Amount 2 from IRA Account F at Insurance Company C, then opened IRA Account G-2 at Financial Institution D using an application form supplied by D's clearing house, Financial Institution D-1. The check was payable to Financial Institution D and should have landed in the new IRA. A clerical error put it into Account G-1, an ordinary brokerage account Taxpayer A also held there, where it was spent on equities. When Financial Advisor B moved firms, the assets followed into Account H at Financial Institution E, another non-IRA account. Taxpayer A found out only on receiving the Form 1099-R, by which time the 60 days had run. The Service waived the deadline and also ruled that the amount would not be subject to the 10 percent additional tax on early distributions.

The second ruling is the interesting part. Section 72(t) imposes that additional tax on amounts received before the taxpayer attains age 59 and a half, and the letter recites that limit in its summary of the section. It never states Taxpayer A's age. Nothing in the facts establishes that Taxpayer A was under 59 and a half, so the letter rules on a tax it has not shown could reach this distribution. The conclusion is harmless, since the waiver makes the amount a rollover and a rollover is not a taxable distribution at all, but the ruling is granted without the fact that would make it a question. Compare 0850051 in this same release, where Taxpayer A is expressly aged 54, plainly inside the reach of section 72(t), and no such ruling was sought.

The blame also moves between the facts and the analysis. The facts open by attributing the failure to an error committed by Financial Institution D, or by its clearing house Financial Institution D-1. The analysis finds the submission consistent with an error committed by Financial Advisor B, or Financial Institutions D or D-1, adding an actor the facts never accused. The footnote pulls the other way again, quoting Advisor B's own confirmation that the funds should have gone into an IRA account opened at Financial Institution D-1, where the facts say Account G-2 was opened with Financial Institution D. The bracketed insertion naming D-1 is the letter's own.

Rev. Proc. 2003-16 lists four factors, and the third is the use of the amount distributed. Here the money was applied to the purchase of equities in a taxable account and later moved again. That factor is recited and then never mentioned, as it is in 0850056 and 0850055 in this release, all three of which turn entirely on the first factor. Amount 1, the value of Account F, is defined in the legend and recited once and then plays no part in anything.

Section 408(d)(3)(I) is printed three different ways in this one letter: as (I) where the section is first summarized, as (1) in the next sentence, and twice as (!) in the analysis. That is a wider spread than the two renderings in 0850057 in this release. Age 59 and a half renders as "591%", which joins "70 %" in 0850055 and "70 7" in 0850058 as a fraction the scan could not hold. The signature scrawl reads "Caller A Watkins" above the printed name of Carlton A. Watkins, and the page numbers are garbled throughout. Those are left as scanned. Four OCR corrections were applied: the form number "4099-R" to "1099-R", which was its only appearance in the document, "incorne taxes" to "income taxes", "2003-4 |.R.B. 359" to "2003-4 I.R.B. 359", and "Section.72(t)" to "Section 72(t)". The cited revenue procedure is reproduced as released and was not independently confirmed here, because citation lookup was unavailable in this session.

Ruling snapshot

Waiver granted. The Service waived the 60-day rollover requirement for the withdrawal of Amount 2 from IRA Account F, gave Taxpayer A 60 days from issuance to contribute Amount 2 into a rollover IRA, and ruled that the amount will not be subject to the 10 percent additional tax under section 72(t).

Full text (IRS public release)

2UV85005 3

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

TAX EXEMPT AND SEP 11 2008

GOVERNMENT ENTITIES
DIVISION

Uniform Issue List: 408.03-00; 72.20-00

HEKKRAKAAHKREREREUEKEREEEKE
HAKKAR HAKEREREEE

KAKKKHEKRIRKEEKEHKEEREKRAKEEEWEERE

Legend:

Taxpayer A i KREKEKAERREREEERRERENUKEEAE

HAKHHEKKEREAERKEEKEAKEREEREK

Financial Advisor B Meer cctererrttrscrc sy
Insurance Company C Bprrerrrorcerrcccctetccererrrrectccs ©
Financial Institution D Beerecrctrcrcctrerrttririerc ros oss l is
Financial Institution D-1 Bee eteretet tier sor

Financial Institution E = RAIKKKKREARAAAKRERENEAERREEEREEEEAEETE

A t F — RKKRAKKKERERAAEREIREAEKERERERERREREEAEEEERE
ccoun =
KHRKKK KIKWETE KEE REREEREREEREEEEURER
HAKKKEKAKCHEERERERREWEEKHERE
RAKKRKKKKKEHEREEREREEEAEKREREREEEREREEE
Account G-1 a HURRAH EAUKEREKEEERAEEEEEREERAEEEE

KWRKAKKIRIKHEAKEREEAKENEEREREREEEEEEEE

= de dee te He te ee ee KK HK HH HEARERS
Account G-2 =

HAKREREAKHEREHERRERERERE ERE EEE EEREEEEE

a Terrrrrrorrerrrerr rere rte Leb ee kd
Account H =

HHA AREER EERE EEENKAREREEEREEE

Amount 1 me RAR RAK

Amount 2 KERAAKKRHEKARERKEE EEE

20085005 3

RAKE KEE ARIK KEK EKER IEE 0

This is in response to a letter dated March 30, 2007, as supplemented by
correspondence dated January 2, February 20, April 7, April 17, May 8, and
May 9, 2008, in which you request 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 asserts that his failure to accomplish a rollover within the 60-day period
prescribed by section 408(d)(3) of the Code was due to an error committed by
Financial Institution D (or by its “clearing house,” Financial Institution D-1) which led
to Amount 2 being deposited into non-IRA Account G-1.

Taxpayer A is the owner of Account F, an individual retirement arrangement (“IRA”)
maintained with Insurance Company C. As of ********, **** Account F was valued at
Amount 1.

Taxpayer A has a business relationship with Financial Advisor B who, until late ****
or early ****, was associated with Financial Institution D. Advisor B is now affiliated
with Financial Institution E.

On **********, ****, Insurance Company C issued a check for Amount 2 to Taxpayer A,
by which Taxpayer A withdrew Amount 2 from IRA Account F. By application dated
ateeeereee o* Taxpayer A opened IRA Account G-2 with Financial Institution D,
using an application form provided by Financial Institution D-1, Financial

Institution D’s “clearing house.” Taxpayer A then sent a check for Amount 2 to
Financial Institution D-1. Taxpayer A’s check was payable to the order of Financial
institution D, and should have been deposited into Account G-2, Taxpayer A’s newly-
established qualified IRA. However, on sexnseeeee te due to a Clerical error,
Amount 2 was deposited instead into Account G-1, a non-IRA brokerage account
maintained by Taxpayer A with Financial Institution D, where it was applied to the
purchase of equities.

When Financial Advisor B moved from Financial Institution D to Financial Institu-
tion E, Taxpayer A transferred the assets from Account G-1 to Account H at

‘By letter dated steeeeeeee* #4 Einancial Advisor B confirmed Taxpayer A's description of the events
of ********7*, ****, specifically “...that the funds were deposited in error into a normal cash account, and
they should have been deposited into an IRA account opened for him at [Financial Institution D-1].”_ In
subsequent correspondence dated ****", **** Financial Advisor B further stated that Taxpayer A

intended that the equity purchase [that took place with the rollover funds in the non-IRA account]
should have taken place within the IRA.

20085005 3

Financial Institution E. Account H also is a non-IRA brokerage account. Financial
Institution E will establish an IRA account for Taxpayer A, if he receives a ruling
granting him a waiver of the 60-day rollover requirement.

Taxpayer A discovered the error regarding Amount 2 when he received a Form
1099-R for Amount 2 from Insurance Company C, to be used in preparation of his
*«** income taxes. However, by the time Taxpayer A discovered the error, the
period allowed under section 408(d)(3) of the Code for completion of a rollover of
Amount 2 into another eligible retirement plan had expired. Amount 2 remains in a
money market fund in Account H.

Based on the above facts and representations, you request rulings that: (1) the
Internal Revenue Service (“Service”) waive the 60-day rollover requirement contained
in section 408(d)(3) of the Code with respect to the withdrawal of Amount 2 from IRA
Account F; and (2) that Amount 2 will not be subject to additional tax under section
72(t) of the Code.

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 60" 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 60" 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

4. 2UU850U53

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)(E) of the Code provides that the rollover provisions of section
408(d) do not apply to any amount required to be distributed under section 408(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 subject to such requirement. Only distributions that occurred after
December 31, 2001, are eligible for the waiver under section 408(d)(3)(1) of the Code.

Section 72(t) of the Code generally provides that unless an exception applies with
respect to any taxpayer who receives an amount from a qualified retirement plan,
including an IRA, prior to attaining age 591%, the taxpayer's tax for the taxable year in
which such amount is received shall be increased by an amount equal to 10 percent
of the portion of such amount which is includible in gross income.

Rev. Proc. 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)(!), 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 and documentation submitted by Taxpayer A is consistent
with his assertion that his failure to accomplish a timely rollover was due to an error
committed by Financial Advisor B, or Financial Institutions D or D-1, causing

Amount 2 to be deposited into Account G-1, a non-IRA account.

Therefore, pursuant to section 408(d)(3)(!) of the Code, the Service hereby waives
the 60-day rollover requirement with respect to the withdrawal of Amount 2 from IRA
Account F. Taxpayer A is granted a period of 60 days from the issuance of this ruling
letter to contribute Amount 2 into a rollover IRA. Provided all other requirements of
section 408(d)(3) of the Code, except the 60-day requirement, are met with respect to

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2085005 3

such contribution, Amount 2 will be considered a rollover contribution within the
meaning of section 408(d)(3) of the Code and will not be subject to the 10 percent
additional tax on early distributions under section 72(t) 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 that may
be applicable thereto.

This ruling 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.

Copies of this letter and related documents have 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 address all correspondence to SE:T:EP:RA:T1.

Sincerely,

Caller A Watkins

Carlton A. Watkins, Manager
Employee Plans Technical Group 1